What Type of Life Insurance Do I Need (Part 1)?

In our previous post, “What Type of Life Insurance Do I Need?” we suggested in order to determine what kind of coverage is needed you should first acknowledge whether the need for coverage is short term or long term.  Once you have made your decision then it is time to move to the next step…deciding which policy is right for you?

First, we will begin by reviewing term life insurance. Term life insurance is a type of policy that lasts for a specified number of years, or term. You determine the term of the coverage prior to purchasing the policy. The most common forms of term life insurance are 10-year, 20-year, and 30-year, but you can also purchase 15-year and 25-year coverage. In fact, there are some carriers that will let you pick any term up to 30-years (e.g. 18-year term life insurance).

It is important to note 5-year term is also available, but the premium is typically the same as a 10-year term policy. If you only need coverage for 5-years then purchase a 10-year term policy and surrender it after 5-years. If you change your mind on how long you’d like to have the coverage then keep it longer.

When you acquire a life insurance policy you are not under an obligation to keep the policy. You can surrender the policy at any time. Fortunately for you, the life insurance carrier does not have the same option.

The longer the “term” on a term life insurance policy, the more expensive the premium. Take the example of 45-year old male, assuming a preferred nonsmoker health class:

Term Premium Face Amount
10-Year $798 $1,000,000
20-Year $1,408 $1,000,000
30-Year $2,348 $1,000,000

As you can see the cost of a 30-year term insurance policy is more than a 10-year term policy. This makes sense because the period of time the life insurance carrier is providing coverage is greater. Are you more likely to die in the next 10-years or 30-years?

Term life insurance is an inexpensive way to purchase life insurance. The downside of term life insurance is if you outlive the “term” of the coverage you won’t have any coverage. Term insurance is equivalent to renting a home. If you get to the end of the term and you still need coverage then you have to reapply for new coverage. If you have had a change in health you may not be able to qualify for new coverage. Also, it will be more expensive because you are now older then you were when you originally acquired the coverage.

When purchasing term life insurance coverage it is important to make sure it is convertible. What this means is at any point during the “term” you can convert the policy based on your insurance health class when the policy was issued, regardless of your current health. This options allows you to convert to a permanent policy.

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