You and your significant other just had a baby. Now you’re worried that if something ever happened to you, your spouse and child may not have the financial protection they need.
One solution could be to purchase a term life insurance policy.
Whether or not that thought has ever crossed your mind, it’s a good idea to learn more about term life insurance, advises Michael Beloff. He’s a certified financial planner and founder of Belvedere Wealth Partners in Stamford, Connecticut.
If you’re reading this article, consider yourself one of the lucky ones: 48% of all Americans don’t have any life insurance policy, according to the latest data from the Life Insurance Marketing and Research Association (LIMRA).
Yet 42% of American households would suffer financial hardship if a family wage earner died unexpectedly, with about a quarter feeling those effects within just a month.
The good news? It doesn’t have to be that way. Below, find 7 questions to ask before purchasing a term life insurance policy.
Looking for more information about term life insurance? Find more information here.
1. What is term life insurance, and how does it work?
Term life insurance pays a lump sum cash benefit to help your loved ones in the event of your death. It isn’t a permanent plan; it’s for a set period of years, generally 10 to 20.
“It’s a temporary hedge against a very large event: your death,” explains Beloff. “The idea is to spend a small amount of money to insure in case of a catastrophe. Since the average life expectancy is well into the 70s, only a low percentage of term policies pay out. Insurance companies know this and price their plans accordingly.”
If you’re looking for something a little more permanent, there are other options like whole life insurance, which covers your entire life. You pay a monthly premium (bill) for it like a term policy, but it accumulates a cash value over time. It’s always a good idea to check your options before purchasing a life insurance policy.
2. How much will term life insurance cost?
If you’re worried that a term life insurance policy might be too expensive, don’t be. Half of all Americans estimate term life insurance to be 3 times what it actually costs, according to LIMRA.
In fact, the cost of term life insurance for a healthy 30-year-old is only around $160 per year.
The premium you pay depends on your age, overall health, risk factors (like whether you smoke), and the value of the death benefit, explains Beloff.
3. How much term life insurance does a person need?
There’s no single right answer. You can buy insurance equal to 20 times your salary, says Beloff, which may cover your kids from the time they’re babies until they’re nearly out of college. But if you and your spouse both earn an income, you may not need as much.
In some cases, though, you may need more insurance, says Beloff.
Many insurance providers now have online calculators, which can help you come up with the best amount of insurance for your family.
You also need to weigh the pros and cons of a 15- or 20-year policy against a 30-year one. “A 30-year policy can be twice as expensive as a 20-year one,” says Beloff.
4. When is the right time to get a term life insurance policy?
While anyone can benefit from a term life policy, it makes the most sense to purchase one right before you have your first child, says Beloff.
You may also want to consider a term life policy if you financially support a significant other or spouse, he adds. That way, you can provide some assistance to them if you unexpectedly die.
If you have kids, it’s particularly important to purchase term life insurance if your spouse stays at home with them, says Beloff. “You’ll need a policy that’s large enough to fund childcare for 10 to 15 years so that the primary wage earner can continue to work,” he says.
5. Does health history affect how much a policy costs?
This much is true: you’ll get the best rates on term life insurance if you’re young and healthy, says Beloff.
But if you have a chronic health condition like diabetes or cancer, which may put you at a higher risk of death, the insurance-buying process may include a medical exam to determine your monthly premium. In other words, the less healthy you are, the higher your monthly premium will likely be.
But over the past few years, insurance companies have become less strict. “If you purchase less than a million dollars in term life insurance, especially if you’re under 40, companies are less likely to require a medical exam — they may just check your height and weight and review your most recent medical records,” says Beloff.
6. Do you need term life insurance if you already get life insurance through work?
The simple answer is yes. The average maximum life insurance policy from a job pays only around $200,000, according to the U.S. Bureau of Labor Statistics.
Depending on what you make per year, that amount may not be enough to replace your income if you have a spouse or children.
You also usually can’t take your life insurance policy with you if you lose or switch jobs, adds Beloff.
7. Will your term life insurance cover you if you become seriously ill or disabled?
In some cases, you can add a critical illness rider to your term life insurance policy. The rider, which provides you with added benefits that your term life policy doesn’t offer, will pay you a lump sum if you have a heart attack, renal failure, or stroke, or if you’re diagnosed with cancer. That amount is simply subtracted from your term life insurance benefit.
Now’s the time to start thinking about your future. See what life insurance policy might be best for you.
Centers for Disease Control and Prevention. "Provisional Life Expectancy Estimates for
January through June, 2020." February 2021. Retrieved from https://www.cdc.gov/nchs/data/vsrr/VSRR10-508.pdf.
Life Insurance Marketing and Research Association (LIMRA). "Facts About Life 2021." September 2021. Retrieved from https://www.limra.com/siteassets/newsroom/fact-tank/fact-sheets/facts-of-life-2021-format-vfinal.pdf.
LIMRA. "Top Misconceptions About Life Insurance." 2021. Retrieved from https://www.limra.com/siteassets/research/research-abstracts/2021/2021-insurance-barometer-study/2021_barometer-infographic.pdf.
National Association of Insurance Commissioners. "Life Insurance." August 25, 2021. Retrieved from https://content.naic.org/cipr_topics/topic_life_insurance.htm.
UnitedHealthOne. "Term Life Insurance." Retrieved from https://www.uhone.com/health-insurance/supplemental/term-life-insurance?LeadSourceName=UHC-Website-TermLife. Accessed January 31, 2022.
US Bureau of Labor Statistics. "Life insurance plans: Maximum benefit amount." March 2018. Retrieved from https://www.bls.gov/ncs/ebs/benefits/2018/ownership/civilian/table20a.htm.