UPDATED: Feb 3, 2017
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Life insurance provides valuable peace of mind for people who may worry about the financial safety of their loved ones. It can ensure that your family will be cared for after your death, and it can help to mitigate any lingering expenses you may leave behind. Whether you choose a small policy to pay for funeral expenses or a larger one to provide years of support to your loved ones, life insurance is a good investment.
The most common and affordable type of life insurance is term life. Term life insurance policies are simple to understand and very flexible, which makes them an ideal choice for most people. If you’re considering life insurance, beginning your research with term makes a lot of sense.
How Does Term Life Insurance Work?
Policies are sold in predetermined lengths, such as 10 or 20 years. When you buy a term life insurance policy, you are guaranteed coverage for the duration of that period. Imagine, for example, that a person buys a $100,000 policy with a 10 year term. Whether that person dies in the first or tenth year of the policy, his beneficiaries will still receive the full $100,000. If the policyholder lives past the tenth year, the policy will end and a new one must be purchased.
Unlike other types of insurance, term life policies have no cash value. You cannot withdraw money or borrow against them. If you live past the end of the policy term, all money paid in premiums is gone. For this reason, some people look towards other products like whole life or variable life insurance that has some cash value. However, term policies have many benefits over these other types of coverage, including lower premiums.
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What Does Term Life Cost?
There is no single price for any insurance policy. Rates will vary between providers, and two people with an identical policy may still pay different rates. The price of any life insurance policy is dependent on numerous factors:
- The age of the applicant
- The applicant’s general health and habits
- Whether the applicant has a dangerous job or hobbies
- The length of the policy term
- The amount of the death benefit
- Whether there are any limitations on the policy
In general, premiums become cheaper as the insurance company’s odds of paying a claim go down. In other words, young healthy people who are unlikely to pass away during the policy’s term will pay substantially less for insurance than elderly people or those with chronic illnesses.
Of course, it is often possible to obtain term life insurance even if you are not young or healthy, but you may need to make sacrifices. You might need to choose a policy that offers benefits from only certain causes of death, or you may need to choose a shorter term or lower death benefit than you might otherwise have wanted. The only way to know for sure which options are available to you is to start getting quotes and comparison shopping between multiple insurers.
How Much Coverage Should I Get?
The amount of your term policy will vary depending on several factors. First, you’ll want to consider the cost: You don’t want to buy an expensive policy if you cannot afford its monthly premiums. Once you determine your budget, however, you’ll be faced with a few decisions.
Before you can know how much insurance you need, you must decide what the death benefit should pay for. Consider the needs of your loved ones and what might happen to them after you pass away. If you’re the primary income earner for your family, you will have different needs from a stay-at-home parent. If you have young children at home, you’ll want a different policy than a retiree.
In general, people use life insurance for one of three things:
- Paying off the insured’s final expenses. This includes funeral costs and any lingering medical debt associated with the insured’s death. This is the most common use of life insurance among elderly people, and it requires a relatively small death benefit.
- Providing financial security to the insured’s living relatives. In addition to paying for the expenses listed above, some insureds may wish to pay off any outstanding debts, like a mortgage, so that these are not passed down. A policy may also include several months or even a year’s worth of living expenses to give the family ample time to recover from the loss.
- Creating a nest egg for the insured’s beneficiaries. In addition to providing for their loved one’s immediate needs, a person may want to leave behind enough money that his family can truly benefit for the long term. A common example is buying a policy that can pay for a child’s college tuition if the parent dies.
A good rule of thumb is to start with ten times current earnings or the cost to replace the services you provide for the household. A primary income earner making $50,000 a year for example, may consider a term life insurance policy for $500,000. A stay-at-home parent may opt for a policy that is ten times more than the cost of hiring a nanny, a cleaning service, laundry services, and anything else they perform on a regular basis.
Once you’ve considered your family’s needs, you can decide for yourself how much insurance you need to buy. From there, you can begin comparison shopping among insurers to get the best deal on a policy. Together, you and your insurance company can work to create a policy that will fit your family’s needs as well as your budget.