Ultimate Guide to Term Life Insurance

Term life insurance is by far the most well-known type of life insurance policy.  Most people have heard of term from the financial guru shows like Dave Ramsey or Clark Howard.  They frequently tout the benefits of term insurance.  Is it really all it is cracked up to be?  Let’s take a deep dive into what term insurance is and what it is not.  What it can do for you and where it might fall short.

At the end of our journey, you will be able to decide if term is the life insurance for you.

 

What is Term Life Insurance?

Ok, let’s get the basics out of the way first, what exactly is term life insurance?

Term life insurance is known as pure insurance.  It has a specific death benefit and a limited coverage period or “term”.  This length can range from annually renewable, where your coverage rate is level for a 1-year period and increases each year as you age, to 40 years of level rates.  Basic term has nothing else to offer, just good bang for your buck coverage at the lowest possible cost.

ART annual renewable term

ART premium is the absolute cheapest possible the day you take your policy out.  That rate is good for 1 year and increases each anniversary of your contract.  This can be ok for a very short duration need, but the companies that offer this will limit your search.  The rate may still be less after a couple of increases but there comes a day that you are actually going to be paying more than you would have if you locked in a level premium for a set duration.  So if you have a need for longer coverage you will want to go with a level term with a set duration.

Level Term

Level term is most widely available in terms of 10, 15, 20, 25, 30, 35, 40 years.  Going with 25, 35, 40 will really limit the variety of term life insurance companies to chose from.    These numbers are exactly what they seem the number of years that your policy is guaranteed to stay level.  That applies to both the face amount and the premium.

This is great for planning those large needs.  You know if you have 18 years left on your mortgage you can protect your spouse from that burden and the need will be gone when the policy expires.  Same with paying for a childs college fund.  With little ones, you can subtract their age from the early 20’s and determine a good time frame for that need.  Hopefully, if all goes well they will be self-sufficient by then.

These are temporary needs which is a key factor in determining the right type of life insurance to buy.

The cost of level term is directly related to the term that you chose.  Many clients mix this up with a mortgage and think the longer term the cheaper the policy will be, this is actually the opposite, here is why.  You will never be younger than you are right now.  That means that every minute and every day that goes by you are that much closer to death.  Sounds terrible but it is true!  So from a life insurance perspective the older, you get the closer you are to dying.  Companies know that too, and the rates reflect that.

Let’s say you are 30 years old.  A 10-year plan will be dirt cheap because there is a very low chance that you will pass away in that time.  So the company is betting that you will live and they will have no claim.  That pass that savings on to you.  Contrast that with a 40-year plan, you are still well short of the mid 80’s life expectancy but a lot more can happen in that time.  A lot more opportunity for a tragedy or an illness of some sort to wreak havoc.  The premium will be more for that reason.  The company is sure to have to pay claims in that case, maybe not on you (no one wants to use their life insurance!) but overall there will be more paid out.  These rates will surely be more, yet they will still be a fraction of a permanent policy.  A permanent policy, in theory, has a 100% chance of claim since you can not outlive it.

Simplified Issue Term

SI can apply to both level and ART policies.  The major difference here is the process you go through to qualify for coverage.  These take a different approach to underwriting.  Instead of putting you through every hoop of a traditional life insurance underwriting, they “Simplify” it.

Also referred to as non-medical or no exam policies, you can skip the intrusion of nurses with needles and peeing in a cup.  Instead, these plans rely heavily on alternative options to determine what type of risk you are.

They start with an Rx check, MVR (driving record), and a detailed phone interview.  If those are all satisfactory you could be approved in a matter of minutes!  Any red flags raised may trigger an inquiry with your primary doctor for a more complete medical history.  This will typically add a couple of weeks to your decision but still no visit from an examiner to poke around.

Sounds too good to be true?  Well, there are some trade-offs to convenience.  It is just like everything else we pay for it.  Rates for these plans can be anywhere from 10-30% higher than a more traditional policy.   That is a small price to pay for some.  If you are afraid of needles or extremely busy it can be just the thing to get you past that hurdle.

Return of Premium Term

This one has become less and less available in recent years.  Once a very popular way to combat the concern of outliving your term life insurance, it has become difficult to come by.

ROP or return of premium life was designed to lessen the blow to “wasting” your money on term.  Many people were asking “is term insurance a good idea?”  To pay a premium for 40 years and not get any payout was hard to swallow.  That is where ROP came in.  Many companies offered a return of premium option.  The cost was often as much as 5x a base term policy but people liked it because they got all of the premium back at the end of the policy.  It was like a forced savings account and you knew you were covered by either the death benefit or getting all your money back.

Well with all the other more flexible savings options out there these policies just never got traction.  They were far too expensive and often even rivaled the cost of a permanent plan but with fewer benefits.  There are a few plans still around but the cost is still much higher than the basic alternative.

How Much Does Term Life Insurance Cost?

Ok so at this point you may be thinking that term is the right fit for you?  What does the process look like to get a policy?  What can I expect to pay for my policy?

First, revisit that simplified issue section, does that sound like you?  If simplified sounds best you need to look for a company that offers that type of underwriting.  Reach out to us to find out what companies are best, this list is constantly changing as more and more companies are coming out with options.  This will be the quickest way to get covered but might come at a slightly higher cost.

If you are more interested in the best possible rates for term life insurance you will need to opt for a fully underwritten policy.

These factors will have the biggest impact on your rates

  • Age
  • Current Health
  • Face Amount
  • Term Length
  • Driving Record
  • Your Occupation
  • Lifestyle (SCUBA, Pilot, Moutain Climber, Race Driver, Etc.)
  • Family History
  • Tobacco/ Marijuana User?

Things to share with your agent for the best rates

A wrong move here could cost you thousands of dollars.  We have a great relationship with dozens of companies for a reason.  They all have strengths and weaknesses.  We get to know your needs and then use the strengths to your advantage and avoid the weaknesses.

Many people think that they will save money by contacting a company directly and that is just not true, in fact, it could be very much the opposite.  The sales team for the carriers are trained to do one thing, SELL.  They will always try to get you to apply with that company, it is all they have.  That is why it is important to share your situation with us.  We can make a recommendation based on our knowledge and experience.  And the prices are exactly the same no matter where you buy your policy for that particular company.  It is not like other goods, we can not run a sale to attract business.  The rate is set by the company.

Where a life insurance broker makes the most impact for you

By putting you in the right company for your needs.  I recently had a client that I felt would be a sure bet for Preferred Plus the best possible rate.  He was open and honest about all the things we need to know.  We were both surprised with his labs, his cholesterol was higher than expected…  This caused him to be put into a standard class and the price DOUBLED!!!  Rather than convince him that he was stuck with this much higher cost, we moved to another company that is more lenient with cholesterol.  His final rate was Preferred Plus and now he is getting the price he deserves.  Had he gone with the company direct they would not have made that offer, nor let him know another company would.

Other things to consider

After deciding the best fit for you and making the company choice.  Other factors for the cost of term life insurance are any of those add ons you selected?  Are you the type of customer that likes to pay with automatic withdraw?  If not you might have to make your payments in batches.  Most companies no longer offer a monthly bill in the mail.  To get that you have to pay quarterly, semi-annually, or annually.  Paying for your policy annually is one more way to save.  Carriers actually give a discount for paying all up front.  This discount can range from 3% to as much as 5.6%!  This might not seem like much if your payment is low but that can really add up if you have a large premium.

What Happens if I Outlive My Term Life Insurance?

Ok so now we understand what term life is.  What happens at the end of your chosen term?

There are a few ways to address this issue.  The right choice here is as unique as you are.  It will really depend on what is best for you.  You can:

  1. Discontinue the policy
  2. Shop for a new policy
  3. Continue the policy ( But I thought it expired? More below.)
  4. Convert the policy

Discontinue the Policy

If you no longer have a need for life insurance you can just end the policy.  The premium is no longer due and you no longer have the coverage.

Your house is paid off?  Retired and no longer rely on saving up?  Kids are out on their own and no longer depend on you?  You probably don’t need much if any coverage anymore.

This is the plan all along when you follow Dave Ramsey or Suze Orman.  They try to help you save and invest in a way you can self insure later in life.  After all one reason pay as little as possible is so you can save it.

Shop for a New Policy

What if things have changed and you still have a need?  It is kind of like starting over.  Go through the steps before to determine how much you need and for how long?

Is your need tied to something else?  Is it going to be a permanent need this time?

Everything from before still applies here you are just a few years older now.  The cost will be based on your current age and health.

If you are in good health you can likely still get a very affordable plan to cover your new needs.  The rates will be higher but you can still qualify and a new plan is probably still the most affordable.

The last 2 deal with what to do if you outlive the policy and your health has diminished.

Continue the Policy

Many, not all, policies allow you to continue but at the ART rate outlined in the policy schedule.  This can be done without having to do any additional underwriting or answering any health questions.  That is ideal for someone that has seen their health decline and may not be able to qualify for a new policy with favorable rates.

That schedule I mentioned is right in your original policy.  It is set from the beginning so there are no surprises.  You can review it and determine if it is a cost that you can justify.

These rates are typically 4-10x what the cost of the expiring policy was to start, they only get worse from there!  They eventually exceed the death benefit of the policy.  No one keeps the policy that long!  Would you pay $115,000 a year of premium for a $100,000 policy?  Didn’t think so.  That doesn’t include the premium all the years leading up to that.

That is their “nice” way of asking you to lapse the plan.

So what if you still need the coverage but your health is such you can’t qualify, but you can’t plan for such an astronomical premium?  That is where conversions can be a great option.

Convert the Policy

Many term life insurance plans have an option built in to trade your policy in for a permanent plan.  It is called a conversion, you are converting your term policy into something else a permanent policy.  This can be a great option for someone that still has a need for life insurance at the end of the original term.

Conversion does cost more than that term policy you are used to, but the value can be tremendous.

What if you had a heart attack 4 years ago?  You are doing well now and you still need insurance, but that will be in your records if you go through underwriting.  Imagine being able to just transfer that great health rate you have on your term policy?  That is exactly what conversion does for you.  You are allowed to trade to a permanent plan with no underwriting at all.  Not a single medical question, no needles, no phone interview!

The cost of the new policy will be based on your age at the time you decide to exercise the conversion.  Many carriers allow conversions until the age of 70 and there are a few that allow through 75.  The best part is if you qualified for a preferred rate your conversion will be for a preferred rate as well.  This can be a tremendous value for some one with a serious health condition.

I have even had clients that were diagnosed with a terminal condition.  The cost was high but the value was higher.  And they couldn’t be turned down.

Is Term Life Insurance A Good Idea?

Every situation is unique, but for the vast majority of people, term is the primary life insurance to protect their need.  It might not be the only life insurance solution used to address the need but it will always get you the most for your money.  Not only would a huge whole life policy cost a small fortune, you probably don’t have a permanent need for such a large policy anyway.

Take a 40-year-old male for example.  Assume he is healthy and would qualify for preferred rates.  A 20-year term policy with a well-known company like AIG or Lincoln would be just under $850 per year.  Compare that to a whole life policy for the same health class and his rate would be $15,700!  No wonder Dave Ramsey recommends term only.

It is no surprise that term is the most popular type of life insurance when you look at all the great features and the protection you can provide your family without breaking the bank.

I think if you have a large coverage need that term life insurance cannot be beaten.  If you have a lesser need that might be permanent whole life or universal life policy might be a good fit for you.  You will never be younger than you are right now.  Take advantage and lock in that price.  Once you have a policy they can not increase your rate.

We have all had twists and turns in our life.  Even the most well thought out plan can change.  Unlike health insurance, you can have more than one life insurance policy.  Many people don’t realize that.  With term it is easy to address a need as it stands today, you can always add to it later.  Things change, needs change.  What if you have a child?  Start a business?  Sell a business?  Buy or sell a home?  You get the idea.

In conclusion

Term life insurance gives you the best rates.  It is flexible with the use of riders and can be tailored to fit many situations.  Whether or not you need a term policy depends on your circumstances.  A quick life insurance consultation with an experienced broker like us can help you narrow down the best fit for you.

Do you want someone that will work with you to evaluate all the options and walk you through the process from start to finish?  We are big enough to get results and small enough that you aren’t just a number to us.  Our digital tools and resources to keep the process quick and simple, not to short cut great customer service.  Tools like ours are no replacement for a caring experienced independent life insurance agent.  We are TERM LIFE INSURANCE BROKERS but we work with all the other types of life insurance as well.  From starter plans to multi-generational estate plans we have you covered.