Term Life Insurance 101

The reason for life insurance is to replace an asset, pay an expense or replace an income. Life insurance is provided by companies regulated by state insurance departments that must set aside specific reserves to pay claims.

Term insurance does not build up a cash value, but it may keep the premiums level for a number of years. The first question is how much premium can you afford followed by how long do you need the coverage? If your savings are increasing, and your youngest child would graduate from college in 16 years, then a 20-year level term policy might be the one. If you are in good health, but strapped for cash, then maybe an annual renewable policy is the only realistic choice.

The cost of life insurance
As adults, the risk of dying increases with each year we grow older and this means the odds of a life insurance policy paying out increases. So the cost of insurance increases each year to cover the increase in the number of deaths.

Some textbooks refer to term and permanent life insurance. What they are doing is calling it term insurance when the policies do not build up a cash value and referring to those that do build up cash as permanent insurance. However, term insurance can be just as permanent as cash value insurance. Often both a term insurance policy and a cash value policy may be kept in force until age 100. With both policies the cost of insurance increases each year. The difference is the cash value policy charges a higher premium in the early years and uses the excess cash to help pay the premium in later years.

The life insurance buying process
For the vast majority of people, getting life insurance is simply a matter of filling out an application, answering some health questions, getting approved and then paying a premium. Unless the death benefit is pretty high or some of the answers on the health questions require a further look, the vast majority of people will not need to get a physical examination. Once approved, the new life insurance owner will tell the insurance company whether they want to pay the premium annually, quarterly or monthly and either receive a bill or decide to have the premium paid from their checking account. The insurance policy will arrive soon after the life insurance is in place; the owner then has a period of time to decide if they wish to keep it.

What is term life insurance?
Term life insurance is a low cost and effective way to either create an estate or preserve one. The entire process can be completed in less than 30 minutes and typically does not require a physical exam. If there are people who depend on your income, take a look at term life insurance.

How much life insurance coverage do you need?
There are several rules of thumb used to determine the amount of life insurance needed. One method says have a death benefit equal to ten times your annual earnings, another says to take your annual income times the number of years until your youngest child would graduate from college and then add your current debts to the total. Whatever formula you use must answer the question – what would happen if your income went away?

The first question is how much premium can you afford followed by how long do you need the coverage? If your savings are increasing, and your youngest child would graduate from college by the time you are age 56, then the 20-year level term policy might be the one. If you are in good health, but strapped for cash, then maybe the annual renewable policy is the only realistic choice.