As a longtime holder of term life insurance, I am grateful my family has never been in position to take advantage of the benefit of that particular policy.
I originally purchased this coverage in 2005 through my auto insurance company, which qualified our family for a beneficial multi-policy discount. Despite the lack of direct use, after nearly ten years of making faithful monthly payments, I remain equally pleased that this coverage is comfortably in place.
Buying term life insurance does not offer the robust protection that comes from some other forms of insurance. Furthermore, the decision will never mature into an investment by which one can profit while still living, such as a whole life insurance policy.
Despite these limitations, the greater flexibility and affordable price makes it an attractive option for many consumers, especially younger adults. Here is a closer look at term life insurance.
What is Term Life Insurance?
Term life insurance sets up a contract between an insurer and an insured. The terms of the relationship require that a defined death benefit will be paid by the insurer to a named beneficiary if the insured dies while fixed premiums are paid according to a set scheduled. Such policies are typically used by those providing for families, since they guarantee income replacement in the event of untimely death.
As the name suggests, the most significant characteristic of term life insurance is that it remains in effect for a certain period of time. Though occasionally covering a term as little as one year, the length of a policy is most frequently established at ten years. This span allows both parties sufficient time to decide if the relationship should continue in the future.
Some insurers even offer guaranteed renewal (or conversion to whole life) once the term of the original policy lapses. This feature saves the insured the trouble of another medical evaluation and further helps the insurer retain a proven customer. Otherwise, once a term life policy has expired — due to reaching the end of the contract or the customer's failure to make agreed payments — no further obligation exists.
Who Uses Term Life Insurance?
While anyone can pursue term life insurance, rates become prohibitive as one gets older. Insurance companies establish these prices according to mortality tables and the odds of natural death. Such costs are straight-forward and often listed on the very advertisements for insurance coverage. Since price remains predictable, it is additionally easy to work the bill into a family budget.
Term life policies are largely used by healthy, younger individuals to attain protection at an affordable monthly rate. In fact, many mainstream companies offer persons under 40-years-old a benefit of $100,000 for fixed payments around $15 per month. While that payment can help any person or group, it most effectively assists spouses in raising a family when suddenly losing a partner's income.
Help in paying for education is one of the most commonly cited reasons for purchasing term life insurance, but is far from the only possible advantage. Term policies can help loved ones handle the overwhelming responsibilities left behind by unforeseen deaths. Such expenses include funeral and burial costs, home mortgages, car loans, paying off unsecured debts, and medical bills.
What Is Required Prior to Buying a Policy?
Before agreeing to a new policy, an insurance company makes a modest investigation into the overall health of the individual seeking coverage. This research is done to rule out common pre-existing conditions, such as cancer or diabetes. The failure to disclose knowledge of these ailments will invalidate a policy and prevent the paying of a benefit.
Beyond such disclosures, an insurance company generally hopes to establish that the specific customer represents a worthy risk, especially since premiums are likely small. A basic medical check-up, which can include a blood sample, collection of a swab of saliva, and body mass index determination, is often required prior to purchase of the policy. This evaluation is typically without charge, handled by a nurse, and runs 15-30 minutes.
Other times, it is only necessary to answer a series of questions concerning health and lifestyle. Such exam-free insurance costs more because it is written up strictly on an evaluation of traditional risks. However, these policies can advantageously go into place much quicker.
Regardless, the most critical question when screening a new customer typically concerns the use of tobacco products, such as cigarettes. Since overwhelming medical research shows this decision makes a person unhealthier, companies charge significantly higher premiums, even if the tobacco user is still very young.
How to Select the Right Policy
Nothing is more crucial to the purchase of a term life policy than choosing the right company. If planning to make payments over a lengthy period of time, you want to ensure the decision is made correctly from the very beginning. In my case, we decided to use one of the country's largest insurers to write my policy. In doing so, definite comfort is received by knowing this company is not going anywhere, even if I do.
That said, customers often get lower rates by selecting smaller companies. Such purchasers still need a degree of confidence that these businesses will be vibrant if payment of a death benefit is ever required. Information on term life insurers is widely available on the internet and third-party services like SelectQuote.com can be a good starting point.
The other primary consideration prior to purchase is determining the proper level of coverage. Because a term life policy has no independent value, there is little reason to pay for more than necessary. Since this insurance is seldom sold to older persons, a very small percentage of policies are actually paid. That lack of payout keeps rates low and the task of purchasing the right level of coverage much easier.
Before purchase, one should make a careful evaluation of exactly what would be needed in the event of untimely death. While some life-and-death factors are obviously difficult to predict, a careful evaluation of individual responsibilities and family circumstances go a long way in deciding if term life insurance is right for you.