There are numerous reasons to consider the purchase of life insurance. These may include to replace lost income, to pay off a mortgage, or to pay the high cost of a funeral and other final expenses – which today can exceed $10,000. Yet, when considering life insurance coverage, many people are unsure of what type of policy to buy, as well as how much in proceeds to purchase.
What Type of Life Insurance Should You Consider?
In many cases – especially for those who are young and in good health – term life insurance is typically considered. There are several reasons for this. First, term is usually the most affordable form of life insurance coverage on the market. This is because term life includes only pure death benefit protection – without any type of cash value or investment component.
With term life insurance, policies are purchased for certain set time limits, or “terms.” For example, policies typically have terms of 10 years, 15 years, 20 years, or 30 years. Once a term life insurance policy has expired, the insured will typically have to re-qualify for coverage if he or she wants to renew their coverage. This re-qualification will be based on the insured’s then-current age and health condition. Because of this, the premium that is charged on the new policy will typically be higher.
Term life insurance can be considered a good type of coverage for those who are covering “temporary” needs. For example, an individual may want to ensure that his or her 30-year home mortgage will be paid off for their survivors in the event of their death. Therefore, they could purchase a 30-year policy with a death benefit in the amount of the mortgage balance. In this scenario, the term life insurance will expire at the same time that the mortgage balance will be paid off.
Term versus Permanent Life Insurance
Term life insurance differs from permanent life in that permanent life insurance policies provide both death benefit protection, as well as a cash value or an investment component. Through this, the policy holder can build up savings on a tax deferred basis. This means that the funds can grow untaxed until the time they are withdrawn – essentially allowing the money to grow exponentially over time.
The policy holder can either withdraw or borrow the funds that are in the cash value portion of permanent life insurance. However, it is important to note that the amount of any unpaid balance will be counted against the policy’s death benefit should the insured pass away.
Unlike term life policies, permanent life insurance has no particular time limit. This means that permanent life insurance – as the name implies – will remain in force permanently, provided that the premiums are paid. In addition, the amount of the premium will typically remain fixed throughout the life of a permanent life insurance policy. Therefore, while the amount of a permanent life insurance policy’s premium may start out higher than that of a comparable amount of term coverage initially, over time a permanent policy’s premium could end up to be less.
Whereas a term life insurance policy may be a good option for someone who is covering a “temporary” need, permanent life insurance could be better for an individual who plans to keep the policy in force for the duration of his or her entire lifetime. For example, these policies could be good for those who plan to use the policy for paying estate taxes and / or donating the proceeds to a charity.
Types of Term Life Policies
Today, there are several different types of term life insurance policies on the market – some are even specific to certain protection needs. Some of the different types of policies can include the following:
With renewable term, the policy can be renewed by the insured after each time period – or term – has elapsed. The policy holder can do so without the need to complete a new application for coverage or to pass a physical exam.
Although the policy holder is allowed to renew the policy, however, the premium on the plan will likely increase at each renewal. This is due to the insured’s older age and possible adverse health conditions.
A convertible policy allows the insured to convert a term life insurance policy to a permanent life insurance policy at a later date. As long as the conditions of the policy have been maintained and premium payments have been made, the insured will not be required to undergo any new or additional health screening at the time the policy is converted – regardless of their medical condition.
Convertible term allows the policy holder the advantage of obtaining less expensive term life insurance, while still maintaining the option to convert to a permanent policy at a later time in the future as their insurance and financial needs may change.
With a decreasing policy, the death benefit decreases each year, even though the premium remains the same. The decreasing term life policy will end when the death benefit reaches zero.
Potential purchasers of decreasing term life insurance may be those who want to cover the amount of their unpaid mortgage balance. In this case, as the amount of the mortgage balance decreases, so too does the amount of death benefit on the decreasing term life insurance.
Increasing term life insurance is a policy that maintains the same premium throughout the term, but has an increasing amount of death benefit. This type of benefit can oftentimes be purchased as a cost of living rider to a whole life policy.
Insurance companies typically charge low premiums in the first few years after issuing a term life insurance policy because they have screened their applicants and selected only those who are in relatively good health.
On average, insureds tend to remain in good health for the first few years after policies are issued. However, throughout the years, the pattern is that some policy holders who are in good health will drop their coverage while others who are in poor health will keep theirs.
In order to help in offsetting this trend, insurers need to build additional renewal premium charges into the policy in later years to help in covering the additional mortality cost that is associated with this adverse selection. If an individual is in good health, then he or she may apply for new insurance by showing evidence of insurability, and they can once again enjoy the lower mortality charges that are associated with the newly issued policy.
Therefore, some insurers offer reentry term life insurance policies. As long as an insured continues to show evidence of insurability at periodic intervals, their renewal premiums – which are based on lower mortality charges – will remain comparable to the premiums for newly issued term life insurance policies.
Likewise, if the insured is not able to qualify for the lower premium, most policies will also include a maximum amount of premium that could be charged. These maximum renewal premiums are higher than the renewal premiums that are charged for regular renewable term.
Final Expense / Burial Life Insurance
Final expense insurance is a type of life insurance coverage that covers the cost of burial, a funeral, and other related costs. Often referred to as “funeral insurance” or “burial insurance,” final expense generally provides a benefit of between $5,000 and $50,000.
The policy holder on final expense life insurance can name a person (or persons) of their choice as the beneficiary. The beneficiary – in many cases a family member or other loved one – makes the life insurance claim upon the insured’s death and is then responsible for using the proceeds to carry out the policy holder’s wishes.
Many final expense life insurance policies are offered at a lower cost than more traditional forms of life insurance coverage – and final expense plans can allow the policy holder to make affordable monthly or annual premium payments. This makes final expense coverage easy to carry for many – even those on a fixed budget.
In many cases, final expense life insurance is underwritten as either “simplified issue” or “guaranteed issue.” With a simplified issue policy, the applicant is asked several questions regarding their health and medical condition. However, the applicant is not required to take a medical exam.
A guaranteed issue life insurance policy in one in which the applicant is not asked any medical questions at all. Therefore, with these types of plans, anyone who applies will receive coverage. It is important to note, however, that the premiums on these policies are typically higher.
Credit Life Insurance
Credit life insurance is a type of policy that is designed to pay off a person’s debt should the debtor pass away. The face value amount of credit life insurance typically will decrease as the balance of the debt goes down – until both reach zero.
Credit life insurance can protect an individual’s dependents in that they will not be saddled with debt should the borrower die prior to paying off the balance. In some cases, the purchase of credit life insurance is required by a lender prior to loan or credit approval.
Some of the key features of credit life include:
- Policies insure the lives of a debtor for the benefit of a creditor
- Purchased on either an individual or group basis
- Policies are usually decreasing term coverage
- Death benefit proceeds cannot exceed the amount of the indebtedness
- The lender or creditor must apply the death benefit proceeds towards discharging of the loan
- Premiums usually are added to the debtor’s loan installment payments
- The insured is given a Certificate of Insurance
- The borrower’s coverage will terminate when the debt is paid off, refinanced, transferred, or becomes significantly overdue
Credit life insurance can also offer a way to obtain coverage to those who are unable to obtain it in any other way. Although proceeds do not go to the insured’s loved ones, credit life will help in reducing a decedent’s debts, which can help in avoiding financial hardship for the insured’s survivors.
How and Where to Obtain Term Life Insurance Quotes
In order to obtain the best quotes, it is usually a good idea to work with a company that has access to more than just one insurance company. This is because you will be able to compare several different policies and their corresponding premium prices. In many instances, the cost of coverage can differ a great deal – even for the very same coverage – depending on the insurer.
When you’re ready to start shopping for coverage, we can help. We work with many of the top life insurers in the market place, and we can help you to obtain all of the information that you need quickly, easily, and conveniently, directly from your computer and without the need to meet in person with a life insurance agent. Quotes can be viewed online – and when you’re ready to purchase, you can also submit your information via the Internet as well. If you are ready to begin the process of viewing quotes from top life insurance companies, just simply fill out and submit the form on this page.
If you should happen to have any additional questions regarding how life insurance works, how to obtain term life insurance quotes, or even about life insurance in general, the experts at Root Financial are there to help. I am happy to have partnered with them as a top insurance agency so they can address any question or concern that you may have prior to moving forward. They will also walk you through the quote and application process.
We all know that the purchase of life insurance can be a big decision. There is a great deal of information available – and at times, it can almost seem overwhelming. But making sure that you have your family in a secure financial footing no matter what the circumstances is worth the short term process of getting a policy.