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What is Term Life Insurance?
Published: 09/12/2011 by Kevin Mulligan
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Life insurance should be a part of every financial plan you have. You and your family are dependent upon your income, and if you die unexpectedly they will find themselves without income to support them. With life insurance your family will be given a death benefit when your die to help cover their financial needs. Term life insurance is one of the most popular life insurance products available. Is it right for you?
What is Term Life Insurance?
There are two types of life insurance: term life insurance and whole life insurance. Of the two, term life is the more simple and inexpensive of the two options. With term life insurance you sign a contract with the insurance carrier for a specific term for a specific death benefit. The term is a set number of years such as 10 years, 20 years, or 30 years. The death benefit is the amount of money your beneficiaries will receive upon your death in that term. You might buy a term life insurance policy that provides $500,000 in death benefit over a 20 year term.
Term Life Insurance Quoting Process
As you go through the life insurance quoting process, you will be asked to pick your term length and death benefit. The company will ask you some basic health questions like if you smoke to help come up with a mostly accurate quote. The company will then provide you a quote of a monthly or annual cost for your term policy.
If you accept the quote the company will likely want to do a full health analysis on you. Normally this done by sending a contract nurse to your house to take a blood sample. The insurance carrier looks for things like high cholesterol and illegal substances in your system. The healthier you are, the cheaper your insurance costs will be.
How Much Term Life Insurance Should I Buy?
A general rule of thumb for life insurance is to buy insurance coverage equal to 10 years of your salary. This should provide ample time for your family to adapt to the income loss and to cover any major costs during that time period.
However, if you have substantial debts that your family will be left with, it can make sense to buy more coverage. If the amount of debt you carry will take a substantial (or whole) chunk out of the death benefit of your policy then you probably need to buy more insurance.
The Upside to Term Life Insurance
Term life insurance is extraordinarily simple. You have three variables: how long of a term you want coverage for, how large of a death benefit you want, and the annual cost from the insurance company quote. There is no complication from investing being mixed with insurance as it is with a whole life policy. This simplicity makes it very simple to shop for coverage as essentially the lowest cost provider (assuming the insurance provider is in good financial health) should get your business. This competition drives down costs for consumers.
The Downside to Term Life Insurance
There are three potential downsides to term life insurance. First, if you fail to make payments on time, the policy is voided out. Secondly, if you live through the entire term of the policy then you have essentially spent money for insurance that you never used. (Most people see the low cost of term insurance to be worth the benefit their family will get; most people also hope to not use their policies any time soon.) Finally, the only risk to term life insurance is if the insurer is in such poor financial health that they go under. An independent insurance agent can help you identify insurers with solid financial ratings so keep your risk of this low.
