Choose the Right Term Life Insurance

Life insurance is often an important part of any financial plan. Its purpose is to protect the wealth you’ve worked hard to build. It can save a family from having to gut a retirement plan or sell a house after an unexpected death.

The main types of life insurance are term life, whole life insurance and universal life insurance. And within each of those types are further varieties. With so many life insurance options, you can likely find a policy that suits your specific needs. The array of choices can also seem overwhelming at first, but keeping a focus on the reasons you need life insurance will help you pinpoint the right type.

• Can you define the amount and end of the financial obligation you want to cover? For example, this could be the amount you expect to earn until the year you plan to retire. Term life is the best option for specific amounts like this.
• Does the financial obligation stretch indefinitely? For example, using life insurance to fund a trust for a special needs child requires lifelong coverage. Permanent life insurance is right for these situations.

What is Term Life Insurance?

Term life insurance is a contract between a policyholder and an insurance company that says if the insured person passes away within the time period of the policy, the insurer will pay a death benefit to the beneficiaries named on the policy.

If you’re buying term life insurance, you have two main decisions to make: How long the term should be, and how much life insurance you need.

With level term life insurance, the annual cost of the insurance remains the same every year for the term period. Once the level term period is over, you can generally renew the policy, but at higher rates each year you renew.

If you outlive the length of the policy without renewing, the policy expires. There is no refund of what you’ve paid in, unless you bought a policy type called return of premium term life insurance.

Many people buy term life insurance for income replacement. They’re looking for life insurance that will provide funds for a family to pay expenses for a certain number of years if they were no longer there to work and earn money. Term life is also good for:

• Covering the years of a mortgage, so another borrower does not have to sell the house.
• Covering other specific debts that would be passed on to someone else.
• Covering the years until children have graduated from college, to make sure there are funds for tuition and living expenses.

Picking a Term Life Insurance Length

To choose the best length for a term life insurance policy, consider the length of the debt or situation you want to cover. For example, if you’re buying term life to cover the years until your children are through college, and that’s in nine years, you might pick 10-year term life insurance. If you just bought a house and took on a 30-year mortgage, you’re likely looking at 30-year term life.

Term life insurance is typically available in lengths of 5, 10, 15, 20, 25 and 30 years. Some companies are venturing into longer terms. For example: 35 years (available from insurers AIG and Legal & General America, which owns Banner Life and William Penn) and 40 years (from Legal & General America).

The most common term life length purchased is 20 years, says Steve Robinson, Vice President of Partnerships for Legal & General America.

If your family’s financial needs stretch past the typical term life lengths, you should consider a permanent life insurance policy such as universal life insurance.

Most Common Lengths of Term Life Insurance

Length of policyPercent of term life buyers20 years42%10 years25%30 years15%15 years12%Annually renewable (year by year)5%Source: Milliman

How Much Term Life Insurance Do You Need?

A good term life insurance amount is generally one that matches the debts or obligations you want to cover. For example, the top reason for buying life insurance is “income replacement,” according to the 2019 Life Insurance Barometer report by industry groups Life Happens and LIMRA.

This means the insurance is intended to pay a family’s expenses that would have been paid by the person’s salary. If income replacement is your goal, calculate the approximate amount your family would need to maintain their standard of living for the time period you want to cover.

Many term life insurance shoppers request quotes for $1 million in coverage, but ultimately land on buying coverage in the $500,000 to $600,000 range, says Robinson of Legal & General America’s customers. Coverage amounts vary by location, he notes. For example, someone in New York City, with a higher income and higher rent or mortgage, will typically need more life insurance than someone in Sioux Falls, South Dakota.

There are many free online calculators to help you zero in on a good life insurance amount. It’s good to try out a few to get a range of recommended amounts. For example, Life Happens, MassMutual, and Prudential have online calculators.

Factors in Life Insurance Rates

Along with the life insurance amount and term length that you choose, expect these factors to affect your rates:

• Age
• Gender
• Height and weight
• Current and past health
• Family health history (parents and siblings)
• Nicotine and marijuana use
• History of substance abuse
• Driving record (especially DUIs and moving violations)
• Certain hobbies and activities (such as aviation, scuba diving and other risky hobbies, and foreign travel you have planned to certain countries)
• Criminal history
• Credit

What to Expect When You Apply for Term Life Insurance

When you have a quote that you like and are ready to buy a policy, you’ll fill out an application. The life insurance agent will likely go over your application answers. You may be asked to sign releases, such as one for your medical records.

Once the application goes to the insurance company, you may be asked to do a life insurance medical exam. This often includes height, weight, blood pressure, blood and urine samples, and questions about your prescriptions and health to verify the information on the application.

Depending on your age and/or amount of insurance requested, a life insurer might also request an EKG or cognitive assessment.

Behind the scenes, the life insurance company will be doing its own research on you. This often includes:

• Accessing a prescription drug database to see your current and past prescriptions.
• Requesting your medical records (if you signed a consent form).
• Pulling your motor vehicle report.
• Accessing information from past applications for individual life and health insurance from MIB Group.
• For high amounts of life insurance, such as $5 million and up, getting a third-party verified financial statement.

Types of Term Life Insurance

“Level term” is the most common form of term life insurance. It’s the type that offers premiums that don’t change during the years of the policy length that you choose. Other types are:

Annual renewable term: With this type your premiums goes up every year, although you choose a period of insurability that guarantees you won’t have to reapply. It may be good for people who want to close a short gap in life insurance, but a short level-term policy is likely a better choice.

Decreasing term life insurance: Here your premiums stay the same over the length of the policy but the death benefit decreases steadily over time. Mortgage life insurance is a form of decreasing term life. The payout is tied to the declining balance of the mortgage, and the beneficiary is the mortgage lender, not your family. Regular term life insurance is a better bet because your family receives the payout and can use it for any expense they choose.

Return of premium term life insurance: This policy type promises to refund the premiums you paid in if you outlive the policy. As you can imagine, the refund feature makes the policy more expensive.

Other tips for buying term life insurance

• Term life conversion: Make sure the policy is convertible to permanent life insurance later on. This gives you options in the future if you decide you need permanent life insurance. The policy will outline the time period during which conversion is available and the type of permanent policy available through conversion.
• Accelerated death benefits: Make sure the policy offers accelerated death benefits. This gives you the ability to access your own life insurance death benefit while you’re alive if you’re diagnosed with a terminal or severe condition (check the policy for rules). This, too, gives you options in the future.
• Laddering life insurance: If you have life insurance needs of different lengths, you can ladder life insurance policies to save money. For example, you might buy a 30-year policy to cover the length of a mortgage and a 20-year policy (or rider on the 30-year policy) to cover the time until children are out of college. This way you’re not grouping all obligations into one long policy.
• Temporary insurance: You often have to option to include a check for the first premium payment with your application and lock in coverage from your application date forward. It’s common for an application to take a month or more to process. This gives you coverage during the application process. Ask your agent about this “temporary coverage” before you submit the application.