Term Life Insurance: Everything You Need To Know In One Place:
I’m sure that you can agree with me when I say that term life insurance seems to be extremely hard to learn about and even more frustrating to purchase.
But is it?
It turns out that term life insurance has a framework that doesn’t change and once you learn it, life insurance, in general, will be easier to understand and buy.
In this guide today I am going to go over exactly what term life insurance is, how it works, and how to use this information to get the best rates.
I’m sure that you can agree with me when I say that term life insurance seems to be extremely hard to learn about and even more frustrating to purchase.
But is it?
It turns out that term life insurance has a framework that doesn’t change and once you learn it, life insurance, in general, will be easier to understand and buy.
The History Of Term Life Insurance
I think it’s essential to understand why something came into existence to understand its primary purpose.
If you do some basic research, term life insurance is characterized by its low premiums and high coverage amounts, but where did term life come from?
The first life insurance policy was taken out in 1706 by a company known as the Amicable Society for a Perpetual Assurance Office, also considered the first life insurance company in the world.
Cool logo for the first life insurance company in the world
I know the name is a bit long winded; however, I guess back then, long and complicated names were in vogue.
This insurance carrier focused mainly on insuring only its members who were between the ages of 12 and 55 years old.
At the end of the year, the insurance company would divide the share of the “Fees” to the wives and the children of the deceased men in proportion to a number of shares in the company they owned.
Since this company wouldn’t insure people over the age of 55, another insurance company was formed in 1755.
This company was formed by Edward Mores, with the name The Society for Equitable Assurances on Lives and Survivorships.
I know, this name didn’t get any better either:
Mores was the disciple of James Dodson, who passed away before “Equitable” could be fully established.
Even though Edmund Halley wrote the first mortality table or an actuarial table (as seen below) in 1693, you know, the guy, who computed the orbit of Halley’s Comet.
Edmond Halley’s Life Table of 1693.
The math tools for such a formula weren’t available until the 1750s which allowed for the development of modern life insurance.
In 1762 Equitable became the world’s first mutual insurer and it pioneered age based premiums.
These premiums were based on mortality rate which in-turn created the framework for the basis of modern life insurance upon which all life insurance systems are subsequently based.
Mores also introduced the position of an actuary— it was the earliest known reference to the term as a business concern.
The first modern actuary was William Morgan, who was appointed in 1775 and served until 1830.
Term life insurance sales in the USA didn’t start until around the late 1760s.
The Presbyterian Synods in Philadelphia and New York founded the “Corporation for Relief of Poor and Distressed Widows and Children of Presbyterian Ministers” in 1759.
I think this one wins for the oddest and longest name ever, it was later renamed to “Presbyterian Ministers Fund for Life Insurance.”
As you can see, these companies were created to cover the women and children left behind by their husbands and fathers.
Over the ages, these companies evolved into entities that can cover almost anyone and allows you to leave coverage to anyone that has an insurable interest.
Products like Term Life Insurance and Universal Life Insurance were created based on needs and specific customer situations.
Several other types of life insurance came out of these companies as well.
Through several different acquisitions, these companies have come to be known as Aviva, AXA Equitable Life Insurance Company and Nationwide prospectively.
You could say these companies are the oldest (Modern) life insurance companies around.
Them being the oldest, however doesn’t mean they are always the best fit for you.
My friend Chris even created this cool resource that allows you to sort the best life insurance companies.
What Is Term Life Insurance
Many people demonize term life insurance, and it’s misunderstood by even more.
However, it’s so simple that even if it’s your first time buying you might end up laughing at yourself for thinking that there was anything to be afraid of.
So, Let’s get right into this:
Wikipedia defines Term Life Insurance as – Life insurance that provides coverage at a fixed rate of payments for a limited period of time, the relevant term.
After that period expires, coverage at the previous rate is no longer guaranteed.
The client must either forgo coverage or potentially obtain further coverage with different payments or conditions.
Feel free to checkout our video below:
Let’s put this “in Plain English” Term life insurance is life insurance that covers you for a specified term length.
At the end of that term, you can either renew the coverage with a rate increase, let the coverage lapse, or get coverage elsewhere.
The confusing part to the majority of people looking into term life insurance comes when a life insurance agent starts trying to explain to you how term life insurance works.
Instead of using complicated words and “insurance-ese,” I will break it down even further.
Below are the different term lengths that you usually find for a term life insurance policy and what they mean:
Annually Renewable Term (ART):
This term length option will cover you on an annual basis and will renew at the end of each year, this also means that your rates to go up every year as well.
We never recommend this option unless someone only needs coverage for a year to satisfy some legal issues.
10 Year Term:
This term length will cover you for ten years, and at the end of the term it will renew at a higher rate.
15 Year Term:
This term length will cover you for fifteen years, and at the end of the term it will renew at a higher rate.
20 Year Term:
This term length will cover you for twenty years and at the end of the term it will renew at a higher rate.
30 Year Term:
This term length will cover you for thirty years and at the end of the term it will renew at a higher rate.
Other Term Lengths:
Some carriers offer 5-year and 25-year terms; however, the majority of carriers don’t offer those two options as a choice.
What Happens If You Die Before The Term Ends:
This might seem like an odd question, however, I get asked this question often and think it’s important to explain in more detail.
Term Life Insurance coverage will start from day one. There is NO waiting period.
You don’t have to live for the full term length for the coverage to pay out, the term length basically shows how long will your coverage be in force before the rates have to renew or the policy ends.
For Example:
If you are approved for a 30 Year Term policy, your coverage starts from day one, if you pass away any time during that 30 year term, the policy will pay out.
If you die after the 30 year term and did not renew the policy, then the policy has ended and nothing will pay out.
So:
Now that we know what term life insurance is, and also what term length options are available, we need to figure out how much term life insurance you need.
How Much Term Life Insurance Do You Need:
You can qualify for term life insurance coverage normally up to 30 times your annual income.
If you make $75,000 a year, you can get up to $2,250,000 in coverage, this doesn’t mean you need that much, that’s just how much you can qualify for based on your annual income.
I have found that 20 Times your annual income is a great place to start when it comes to purchasing life insurance.
Here’s why:
According to the US Census, the median household income is $56,516, and according to Value Penguine the average household expenses for a family in the US are $63,784, and you can see a breakdown of the expenses here.
Looking at the above numbers, this means that the average family is going into debt in the amount of $7,268 per year.
It’s amazing that families are living and surviving like this, but the numbers don’t lie.
Found Yourself In The Same Situation?: Check out this awesome list of Personal Finance Blogs put together buy the guys at Rockstar Finance.
If you look at this scenario, the loss of any part of that income would mean complete ruin for a family.
When you purchase 20 Times the income shown above, it will give your family $1,130,320.00 worth of coverage.
This money would be enough to pay off your home, clear up any credit card debt, car notes and coverage final expenses and as well allow your family the ability to grieve.
It would give them the option to decide how to plan out the rest of their personal and financial future.
If you can’t afford the term life rates for a policy that is 20 times your income, just get a plan that you can afford.
I always tell my clients, anything is better than nothing. You can check out some extra resources by clicking here and here that talks more about how much insurance you need.
Now that we have the basics down on, what term life insurance is, the different term length options and how much coverage we can get.
Let’s talk about the various types of term life insurance policies and how they all work.
Types Of Term Life Insurance
Immediate Decision Term Life Insurance
Immediate or Instant Decision Term is one of the newest types of life insurance, brought on by the fintech and insurtech boom.
Immediate decision life insurance in principle, is a kind of process that allows the insurance carrier to use available data from different databases about your health and risk behaviors to make an immediate decision on your coverage.
Immediate Decision Term is becoming one of the best ways to get term life insurance online.
Guaranteed Level Term Life Insurance
Guaranteed Level Term Life Insurance is a type of term life insurance that will ensure your term rates will not increase for the life of the policy.
If you have a 15 Year term for $30.75/month, that rate will stay the same for the full 15 years. Having your rate locked in is an important factor when looking into life insurance.
No matter the type, typically you want something that won’t increase your rates every few years.
There are products like New York Life through AARP life insurance that seem to have lower rates.
However, when you read the fine print you notice your rates will increase every five years, that doesn’t help when you are trying to budget.
Decreasing Term Life Insurance
A Decreasing Term Life Insurance Policy will decrease in value over the life of the policy.
The point of a policy like this was that over time, your financial need for a larger policy would continue to decrease.
These policies are quickly becoming obsolete because there is almost never a time when they are beneficial to a client.
You typically will only ever see this as a type of mortgage protection insurance.
Outside of mortgage protection insurance, you will almost never hear about this kind of policy, especially if you are buying from an agent or online.
If you don’t have any life insurance this is the worst type of policy for you, so make sure you always ask if the coverage is level or if it decreases over time.
Return of Premium Term Life Insurance
Return of Premium Term Life insurance works just how it sounds; your premiums get returned at the end of the policy.
These policies will always be more expensive on a month to month basis than any other type of term life insurance policy simply because your premiums get returned in the end.
So:
If you buy a 30 Year term policy for $75.00/month.
At the end of the 30 years, if you don’t pass away, or let the policy lapse, you will receive a check for $27,000.
It’s like having a savings account and a life insurance policy all in one.
A return of premium policy is a great option; however, it’s normally out of the range someone can afford to spend for their life insurance.
You can check out a post from Money Savvy Living that gives more details about this specific product, click here to read the post.
No Exam Term Life Insurance
No exam term life insurance also works how it sounds. You can be approved for a life insurance policy without the need of a medical exam.
You will find that the rates for these policies will be slightly higher than a policy that will require an exam.
This happens because the carrier is insuring you without anyone seeing you and only based on simple database checks.
Accidental Death Insurance
An Accidental Death Insurance policy is a life insurance policy that will only pay out if your death was the result of an accident.
If you pass away from any other cause of death, this policy will not pay out.
Accidental Death policies should not be the only type of life insurance you have and sometimes come as riders.
There is a new company by the name of Fabric that is making waves by focusing specifically on selling these types of policies.
This policy is usually good if you have a health issue preventing you from getting traditional insurance.
This type of policy generally is guaranteed issue and requires no exam or health questions.
If you think this type of coverage is right for you, click here for some quick rates.
Mortgage Protection Insurance
A mortgage life insurance policy (often referred to as mortgage protection insurance) is traditionally a type of decreasing term life policy.
Over time, the death benefit amount of the policy decreases.
This policy will also pay off your mortgage, directly to the mortgage company in a lump sum payment usually.
You can probably find it much easier to qualify for these types of policies if you have any pre-existing conditions.
However, I think this policy is worth having along side a separate individual life insurance policy to cover any additional final expenses.
image sourced from http://www.44billionlater.com/
Key Person Insurance
A Key Person Insurance policy is a type of life insurance policy that is used to cover a key person of a business.
A key person is usually anyone who is vital to the survival of the business.
If they were to pass away, the business would surely fail.
Key Person Insurance is an important form of insurance to have specifically for small business owners.
Life Insurance Add-ons (Riders)
Whenever you purchase life insurance, there are additional options known as Riders that you can add to the policy to make it even more beneficial to you or your family.
Below is a breakdown of each of the different riders:
All Cause Death Benefit
The All Cause Death Benefit is one of the most significant benefits you can have as part of your policy.
Adding this rider means that your policy will cover you for any and all causes of death.
There are some exclusions; however, they are severe like “death while in the commission of a crime.”
In general, if you die from an accident, terminal illness or natural causes this policy will pay out.
If your policy doesn’t cover All Causes, you probably have an accidental death policy which should not be your only type of life insurance policy.
Accelerated Death Benefit
The Accelerated Death Benefit is also sometimes referred to as a “living benefit” this is because you can have a percentage of the policy pay out while you are still alive.
The way this rider works is that if you get diagnosed with any terminal illness with expectations of living for less than 24 months.
Or if you have a condition that makes you unable to do the simple daily functions of living, the policy will accelerate the death benefit.
Each carrier is different; my policy will Accelerate 75% of my policy if I go blind or have a heart attack or stroke or if I get a terminal illness.
Reading the fine print is very important when adding this rider to your policy.
Accidental Death Benefit
As a Rider, the accidental death benefit will payout in addition to your life insurance policy if you were to pass away from an accident.
For example:
You have a $250,000 Life insurance Policy with a $250,000 Accidental Death Benefit Rider.
If you were to pass away from a Heart Attack, that would not be considered an accident so the policy would only pay out the $250,000 in coverage.
However, if you were to pass away from a car crash or if an airplane engine fell out of the sky and landed on you, that would be considered an accident.
The policy would then pay out the $250,000 insurance policy and also the $250,000 for accidental death for a total of $500,000 in coverage.
Waiver of Premium
The Waiver of Premium rider exists to make sure that if you are ever in a position of temporary or permanent disability that after a certain waiting period, you will no longer have to make premium payments on your policy.
Some policies come with this rider attached for free, and some have an additional cost so be sure to ask if there are extra costs associated with it.
Children’s Term Rider
The Children’s Term Rider allows you to add your children who are 18 years or younger (Age Range Depends on Carrier) to your policy.
Adding this rider saves you the hassle of paperwork, having to find a different carrier and it also gives you premium savings.
In my experience, most of these policies have one set price for any number of kids. If you have two kids or more, this benefit should be considered even more so.
In all:
These riders take your term life insurance policy up a notch and give you additional benefits on top of your life insurance.
You really should consider which options, if any, you would like to have as part of your policy before you start searching so that you are better prepared.
Term Life Vs Whole Life
When it comes to this matchup, until recently, there have always been drastically different opinions on which option is best for you to choose.
Are term life insurance rates best or whole life insurance rates, and why you should choose which option.
However, I bring you great news.
I recently reached out to over 100 Personal finance experts and asked them this simple question:
“Term Life vs Whole Life, which would you choose and why?“
I was able to get 41 experts to respond with the difference between whole life and term life insurance.
This post is the best way to give you an unbiased and honest opinion as well as give you an actual answer based on their votes.
Exam Or No Exam When Buying Life Insurance
First things first, let’s talk about why these two options exist and what they mean.
Exam
When you take an Exam for a life insurance policy, the “Insurance Term” is called being “Fully Underwritten.”
This process (depending on the carrier) can take up to 3 months and requires you to have a medical exam.
This medical exam generally will consist of a urine sample and checking your blood pressure, height and weight as well as the nurse drawing blood.
Your blood work gets sent to the lab, and your results are sent directly to the insurance company for review.
This process can sometimes take up to 75 days due mainly to the medical records request process; however, there are some alternatives.
No Exam
No Exam Life insurance also goes by the name of simplified issue life insurance. This product (as the name states) requires no exam.
The Majority of the product will only cover you up to 250,000 in coverage; however, there are some that will cover you for more.
These products will use three databases along with answers on your application to determine your insurability.
They will check your MIB (Medical Information Bureau) Report, your Prescription Drugs (Intelliscript) and your MVR (Motor Vehicle Report).
Once this information is gathered, the insurance carrier usually will make a decision.
The reason these products offer no exam is that traditionally they will only give you a standard health rating or below.
If you didn’t read about the health ratings above click here and it will all make sense.
Due to more the standard or lower health ratings, these policies usually have, outside of immediate issue or instant issue products they are always more expensive.
If you answer yes to any of these questions, then a “No Exam” product might work best for you.
