Life insurance is purchased for a variety of reasons – to protect future earnings over a breadwinner’s life, to insure the life of a business partner so that funds are available for the business in the case of a premature death, or to provide a legacy for loved ones. If you are purchasing insurance solely for protection purposes for a set number of years – say you want a 20-year policy to cover your children’s expenses in case of your premature death – you will likely want to purchase a term life insurance policy.
What is term insurance?
Just as the name suggests, term insurance is life insurance that provides coverage for a certain period of time, as long as premiums are paid when due. Common lengths of time for term insurance are 10-year, 20-year, and 30-year terms. After the period expires, the client is no longer covered and must re-apply for life insurance coverage if he or she wants continued coverage. Life insurance coverage can be purchased in nearly any amount. Common death benefit coverage amounts are $100,000, $250,000, $500,000, or $1 million, but almost any death benefit amount can be negotiated.
Features to consider
Once you choose your desired coverage amount and length of coverage (term), there are two features to request when obtaining quotes: a guaranteed level premium and a convertible policy. A guaranteed level premium policy means that for the entire duration of your term you will pay the same exact premium. If you are a 35-year-old man who purchased a $1 million, 20-year term policy and received a quote for a monthly premium of $135, a guaranteed level premium policy means you will pay a monthly premium of $135 in every month of the policy – the same premium in year 1 as in year 20. The premium amount and the coverage amount stay constant throughout the full term of the policy. A convertible policy means that you have the right to convert the term policy to a permanent policy during the term without any new or additional screening, including medical exams. Convertible features differ among policies, so it’s important to understand how and when conversion can occur.
Features to avoid
Avoid obtaining an annual renewable term policy if at all possible. An annual renewable term policy is a 1-year policy that the insurer guarantees to renew each year for a set number of years. Annual renewable term policy premiums generally increase each year, sometimes substantially. A person who purchases a $1 million annual renewable term policy could pay $135/month in the first year, but could see increases of 10% or more each year for his monthly premium amount. If you buy an annual renewable term policy, be sure to get a quote that shows you exactly how much the insurer is allowed to raise the premium each year so that you are not caught off guard when the invoice arrives in subsequent years.
Avoid purchasing a no-exam, guaranteed-issue policy if you are young and healthy. Depending on the insurance carrier, younger people with great medical histories may not be required to undergo a full medical exam before being accepted for insurance, but it should not be a deterrent if an exam is required. No-exam insurance is often more expensive than insurance that requires full underwriting.
Bottom line: having proper cover is important. Talk to your Certified Financial Planner™ Practitioner and make sure you’re covered.
Andrea L. Blackwelder, CFP®, ChFC and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with Wisdom Wealth Strategies.