Term Life Insurance

Life insurance helps your beneficiaries replace your income if you pass away. If you have a family situation where others are dependent on your cash compensation for all or part of their lifestyle, term life insurance is a very affordable option to protect against an untimely death. For only around $1,000/year you can usually purchase over $1,000,000 in financial protection for your family if you were to die during the covered period. While your death is unlikely, the risk-adjusted returns may still be attractive: If you do die unexpectedly, an extra million-plus dollars can go a long way to make a terrible situation for your family financially easier.

Term life insurance pays its recipient if the covered person dies during a specified time period (the “term”). Once the term expires, the policyholder often can renew it for another term, convert the policy to permanent coverage, or simply allow the policy to lapse.

Term life insurance is an affordable option to help protect your loved ones in the event of an untimely death. If you pay your premiums and pass away while you are still covered, the tax-free payout (“death benefit”) goes to your chosen beneficiaries. (The policy pays out only if you die during the number of years covered; there is no savings component in term life insurance, while there is in a whole life insurance product.)

If your career goes well and you save appropriately, you are likely not to need the additional savings plan that whole life insurance provides after retirement. Therefore, term life insurance may be a more financially prudent investment as it saves you the extra cost of covering your whole life. Term life insurance works well for startup employees, young professionals, and others who have families with financial needs that would suffer if one should pass unexpectedly, such as a mortgage or college education.

For example, if you have a young family and/or outstanding debts, and are looking for a relatively affordable and uncomplicated way to help provide your family some financial protection, term life insurance may be the perfect option.

Do I need it?

Life insurance, especially Term Life, should be looked at as an income replacement during your working years. Therefore, if you are a young, single person with no dependents, you likely do not need life insurance. You are the only one depending on your income, so if you die, there is no need to replace it. On the other hand, if you are married with young children, purchasing life insurance to protect your partner and children from financial issues if you should die makes more sense. If no one is currently relying on your earnings, you can probably hold off on buying life insurance until you have dependents. 

How much does it cost?

Your specific eligibility and quote will depend on the term length and a variety of health and lifestyle factors, from your age to whether or not you smoke. Depending on the provider you choose, the quote may be in the range of $50-150/month for $1.5M of coverage.

Generally, it is financially prudent to apply for a term life insurance policy when you’re young and healthy, since your monthly premiums won’t change once the plan is granted.

Insurance companies can keep premiums low because most of the time, the policy expires without paying a death benefit. At that point, you would be free to apply for a new policy, however, the premiums may be significantly higher.

What factors might affect my life insurance quote?

These factors might impact your quotes:

• Health and Lifestyle - younger, healthier people are cheaper to insure as they are less likely to incur a payout anytime soon.
• Women have a longer life expectancy, so their rates are generally lower.
• Insurers will also ask you about any risky hobbies or occupations. (While knowledge work is low risk, it’s important to answer all questions accurately and truthfully when signing up for a policy, since incorrect information could jeopardize claims payment.)

Determining your coverage amount

Your life insurance needs will depend on your personal and financial circumstances. With that said, there are some general guidelines you can follow:

1. You can get a rough estimate of your coverage needs by multiplying your current income by 10-15X.

2. Adding up the four areas below will provide you a better idea of your needs:

• Debt: The total of your current debts (excluding your mortgage) plus your estimated final expenses
• Income: Multiply your current income by the number of years that you estimate your family would need support
• Mortgage: The amount remaining on your mortgage
• Education: An estimate of the costs of your children’s education

Choosing your coverage length

If you are looking for coverage for the duration of your life, permanent life insurance might be your best bet. However, if you want coverage over a specific time period (such as a financially demanding one), term life insurance is more appropriate. 

You may want a term that lasts until:

• Your mortgage is paid off
• Your children have completed their schooling
• You retire
• You reach your savings goals

Most coverage is offered in five-, ten- or twenty-year intervals. Some policies may offer an option to convert into whole life insurance after the term ends.

Do I need a medical exam?

Many insurance companies require prospective clients to undergo a complete medical exam (including lab work) and provide a great deal of information (like a motor vehicle report, medical background check, and prescription history) to receive a life insurance quote.

However, other companies have now begun offering term life insurance without a medical exam. Instead, they require prospective clients to answer a series of questions online that helps them determine what life insurance coverage they might be able to offer. In these cases, expect to answer questions about your lifestyle and health, medical history, prescriptions, and prior insurance experience. Your answers replace the info they would normally get from a medical exam, allowing for a much faster application and approval process.

Who can receive the payout from my policy, and how does it work?

There is a lot of flexibility in how the death benefit can be paid out. You can split the benefit between multiple beneficiaries (such as several children), either equally or in proportion to what you see as their varying needs.

Your beneficiary does not need to be an immediate relative either. For example, you can name a domestic partner, fiancé, ex-spouse, sibling, parent, grandparent, or business partner as a beneficiary. They just need to have what’s known as “insurable interest,” meaning that they would be negatively affected in a financial sense if you were to pass.

Alternatively, you could designate charities as your beneficiaries of your term life insurance policy if you desired. As a major bonus to the recipient, the death benefit payout is not subject to income tax with the IRS.