Term life insurance can serve as a cornerstone of a financial plan because it protects what matters most — the ones who you love, and who depend on you to provide for them. That’s why it’s crucial to make researching, selecting and buying the right policy for you as simple as possible. The more you know, the more empowered you can be to make the best financial choices for your family.
You would think the critical elements of any sound financial plan would be simple to understand and to implement into our lives, right? Maybe in a perfect world, that’s how it works. But when it comes to financial products like life insurance, traditionally, it’s been known for being a several-week process … until recently.
And that’s why Haven Life, an online life insurance agency, has put together this quick guide to give you the facts about term life insurance so you can decide if it’s the right coverage for you and, ultimately, for your loved ones.
How does term life insurance work?
Other than being one of the most affordable types of life insurance coverage, term life insurance is a rather simple, straightforward product that provides protection for you and your family for a set period of time.
The key characteristic of this type of life insurance is right in its name — the term length of the policy. That’s the number of years the policy provides protection for your beneficiary or beneficiaries. Common term lengths are 10, 15, 20 or 30 years. If you were to pass away during the term of your coverage, the life insurance payout of your policy, known as a death benefit, would go to the beneficiary or beneficiaries you designated.
Depending on how your beneficiaries choose to use it, the death benefit can help pay the rent and/or mortgage; your children’s education; help pay lingering debts, and in the event of your death, can help those who are mourning your loss to address financial needs and worries during a difficult time. That death benefit is often free from income tax, too.
Term life insurance can provide coverage during the years families may need it most. For example, a parent with young children may want life insurance coverage that lasts at least until the kids finish college. Or a couple that just purchased their first home may choose a term length that lasts until their mortgage is paid off. An online life insurance calculator can help you figure out what term length is right for you.
At the conclusion of the policy’s term length, you can either elect to have your life insurance coverage end or have it continue in increments of one year, which is available due to guaranteed renewability. However, your life insurance premiums will be much higher at that time. That’s why it’s important to buy the right amount of life insurance coverage from the start or another, smaller policy when your needs change. It’ll save you money in the long run instead of needing to extend your life insurance coverage later in life.
How do you know if you need term life insurance?
If you have people in your life who are financially dependent on you, then you probably need life insurance. This means:
- You share financial obligations with a partner or spouse
- You have children or plan to have them soon
- You have family members who rely on your income to pay their bills
- You have cosigned debt — like private student loans — and a cosigner who would be on the hook for them
- Or, you want to leave behind a financial legacy to your loved ones to help with burial expenses or to make life a little bit more comfortable
There are various other scenarios where people choose to buy life insurance, but these are some of the most common. Fundamentally, life insurance is purchased so that the policyholder has the peace of mind that their beneficiary or beneficiaries will be financially protected if anything were to happen to them.
How much term life insurance do you need?
Life insurance needs aren’t one-size-fits-all. However, a common rule of thumb is to have life insurance coverage that’s 5 to 10 times your annual income.
Regardless of the exact amount of life insurance coverage you need, the idea is that your policy should help protect your beneficiary from financial hardship should anything happen to you. Therefore, the amount of coverage you purchase should take into account your expenses such as the mortgage or rent, childcare, debts, and any other day-to-day bills you or your family may have. (Remember: Instead of doing the math in your head, let an online life insurance calculator do the work for you.)
Once you choose a coverage amount and a term length, you’ll pay a monthly premium over the course of that term. While paying monthly for that amount of years might sound a little overwhelming, your coverage is usually the most affordable if you get it while you’re young and healthy.
If you’re curious what your monthly premium might be, you can quickly and easily get life insurance quotes online. For example, a healthy 35-year-old woman in excellent health could buy a 30-year, $500,000 Haven Term policy, issued by MassMutual, for starting at $35.40 per month.
How to buy term life insurance
The internet has completely revamped the process of researching and purchasing life insurance. A process that could take several weeks may now be accomplished conveniently online.
There are several digital tools available that can help take you through the researching and buying of a policy — from calculating how much you need to receiving estimates for coverage, to completing the application process.
The only thing you might not be able to do online? Take a medical exam. Most medically underwritten term life insurance policies still require a medical exam to finalize coverage.
There are some cases, however, where a medical exam may not be needed. Take Haven Life’s InstantTerm process, for example — some qualified applicants 59 and under may be able to finalize coverage without a medical exam. However, it’s very important to be honest when completing the application. The issuance of the policy or payment of benefits may depend upon the answers given in the application and their truthfulness.
While it may be tempting to seek simplified issue or guaranteed issue policies that don’t involve a medical exam, medically underwritten term life insurance is usually a good choice for healthy people looking for affordable coverage in amounts greater than $250,000.
Term life insurance versus permanent life insurance
All this being said — why choose term life? Aren’t there other life insurance policy options out there? There are, but there’s a reason term life insurance is an affordable choice.
The purpose of life insurance is to protect loved ones who rely on some or all of your income. This usually applies when you have minor children or a spouse that you share financial obligations with. You’re unlikely to have people who are 100% financially dependent on you for your entire life, though. That’s where the “term” part comes in handy here for young families.
You choose the amount of coverage you anticipate needing and for the amount of time you think you’ll need it. For example, once your kids are grown, your home is paid off, and you don’t have substantial financial obligations anymore, there’s less of a need for life insurance because the likelihood of financial duress should you pass away is lower.
Permanent life insurance, on the other hand, comes in a few varieties, but the most common are whole life and universal life. Unlike term life insurance, permanent policies cover policyholders for a lifetime and offer a cash value component that can grow or decrease over time. The complexity of these products is also why you should work with a financial professional or agent to purchase and manage it.
Additionally, term life insurance premiums are more affordable than whole life or universal life policies, which often makes them attractive to younger, cash sensitive families. For example, a healthy 35-year-old man in excellent health could purchase a 30-year, $500,000 Haven Term policy starting at about $41.25 per month. A $500,000 whole life insurance policy for that same man would start at about $561.59 per month.*
Whichever type of life insurance you choose, the end goal is the same: protect the ones you love in a way that makes sense for you.
Term life insurance coverage provides a simple, affordable way to help financially protect your family from the worst-case scenario. Hopefully, this guide helped give you a basic understanding of what term life insurance is and why it’s important so you can confidently shop for a policy that fits your needs and successfully put this valuable piece of your financial plan into place.
*Whole life insurance quote is from State Farm Life Insurance Company.
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