Your Money
7 THINGS TO KNOW ABOUT TERM LIFE INSURANCE
How to buy simple protection for your loved ones
For people over 50, there are three main reasons to buy life insurance: to provide income to your family if you die, to help pay off a mortgage, and to cover funeral and burial costs, according to LIMRA, an insurance industry trade group. The COVID pandemic has had a big impact on our thoughts about risk: A record proportion of consumers intend to buy life insurance in the next year, LIMRA and the nonprofit Life Happens found in a recent study.
The simplest and least expensive type of life insurance is a term life policy. Here are some answers to basic questions about this popular form of coverage.
1. How is term life different from other types of life insurance?
A term life policy provides a death benefit during a finite period, such as 10, 20 or 30 years. If you die after the term is up, your beneficiaries won’t receive anything. That makes term life insurance like auto insurance: It will pay out if something bad happens, but otherwise, your premium payments (in most cases) just go to the insurer. In contrast, permanent life insurance, such as whole life, covers you for the rest of your life if you pay the required premiums, meaning a payout is guaranteed. And unlike the case with term life, a whole life policy has a cash value that grows over time; people who are insured can borrow against it or cash in their policy entirely.
Term life insurance is most popular among those who want to provide for loved ones until certain milestones are reached, such as until the children finish college or until the house is paid off, says Michael DeLong, research and advocacy associate with the Consumer Federation of America. Since the chances of a payout are generally low, term life is also a lot cheaper than whole life insurance. A 55-year-old nonsmoking male in good health would pay a premium of $1,380 a month for a whole life policy of $500,000, according to Policygenius.com; the same amount of coverage from a 20-year term policy would cost about $153 a month—nearly 90 percent less.
2. What kinds of term policies can I buy?
There are several varieties of term policies, differentiated by premiums, renewability and payment terms.
→ With a “level-premium” policy, you pay the same amount each month for your coverage; once the term is over, your coverage ends. Your annual premium stays the same for the duration of the policy.
→ A “renewable term” policy gives you the option, once the original term is up, of keeping your coverage in effect without having to repeat the underwriting process. That means an illness that occurs during your first term won’t prevent a renewal. This type of policy carries a higher premium, however, which usually increases with each new term. “I’ve had people who have had bouts with cancer want to renew, and they can because they were healthy when the initial policy was written,” says Rob Burnette, chief executive officer at Outlook Financial Center in Troy, Ohio.
→ With a “return of premium” policy, if you make it through your term without dying, you’ll get back some or all of the premiums you paid. Again, you’ll pay more for the privilege, DeLong says.
3. How big a benefit do I need?
Burnette suggests a DIME approach to estimate your needs—an acronym for “debts, income, mortgage and education.” That means tallying up nonhousing debts, such as car-loan and credit-card balances; determining how much cash your household would need each month to carry on without you (often, the income you bring in each month); and figuring out the balance on a mortgage and any future education costs for your dependents. Take a broad view of income replacement to include nonmonetary contributions. For example, if you’re a caregiver, whether for children or an adult, your family might have to pay someone to perform those duties you’re doing for free.
You should also think about the time frame of your needs, which can help you determine the length of the term. “If your mortgage is going to be paid off in 10 years and your kids are going to be out of college, maybe you need a 10-year term,” says Karen Terry, assistant vice president of insurance research at LIMRA.
4. What if I’m not in the best of health?
If an insurer determines there’s a high chance you’ll die before the term ends, it is less likely to underwrite the policy and more likely to charge a higher premium. Although there are some outliers, most insurers stop selling term policies to consumers between the ages of 65 and 70, Terry says. Also, the older you get, the shorter the terms you may be offered. For example, if you’re 65, you might only be offered a 10- or 20-year term, Terry adds.
If you have had a serious health condition such as cancer, you may not be able to qualify for some policies at all unless you’ve been in remission for a certain period of time. Some policies don’t require a medical exam, but premiums will be higher, DeLong says.
5. What else can affect a policy’s cost?
Just as health problems translate into higher premiums, so do higher ages and longer terms. For example, a 50-year-old nonsmoking man in exceptional health might pay about $70 per month for a 20-year term policy that pays out $500,000, while at 60 that same man might pay $200 per month, according to quotes from Term4Sale.com. That 50-year-old would pay $40 a month for a 10-year term policy and $125 a month for a 30-year term.
One way to offset the higher premiums that come with age is to reduce coverage. For example, if one of your two children has graduated from college and you only need a renewed policy to pay the younger one’s school costs, you can buy a smaller policy.
You might also consider a decreasing term policy, Burnette says. This type of policy pays less over time—useful, for example, if you’re buying insurance to pay off your mortgage.
6. Where do I go to buy insurance?
You can buy directly from an insurance company; from a “captive” insurance agent, who represents one particular insurance company; or from an independent agent, who sells products from more than one insurer. You can also buy through a broker, who doesn’t represent any particular company; a broker’s familiarity with insurers’ varied underwriting standards may be helpful if you believe you will have a hard time qualifying for coverage. You can shop and compare rates for insurance at sites such as Term4Sale.com, SelectQuote.com and Policygenius.com.
Whether you sit down with an agent or broker or shop around online, “do not let yourself be rushed into buying a policy, and don’t be afraid to admit that you don’t understand something and need more time to review,” DeLong advises.
7. How do I know a company will make good on my policy?
Although there has been a spate of recent insolvencies among property and casualty insurers—those that cover houses and cars—life insurance company failures have been rare, Terry says. But it’s still a good idea to investigate a company to make sure it is financially sound before you buy a policy. Your state insurance department is a good place to start, she says. You also can find insurance company ratings for free on WeissRatings.com.
It won’t hurt to do an internet search of the companies you’re considering in order to see if they’ve gotten bad press lately, DeLong says. “If the company has settled a class-action lawsuit or was found guilty of mistreating consumers, those are usually some pretty big red flags.”
Tamara E. Holmes has written about money and careers for publications including USA Today, Working Mother and Essence.