When you finally start to get your financial act together, one of the things you may be asking yourself is — “What is term life insurance?”
Sure, you’ve heard about it and you’ve also probably heard that having a policy is part of an overall successful financial strategy. But you may not know anything more about this policy beyond its name.
Understanding Term Life Insurance
In this article, we’re going to take a look at what term life insurance is, who should get a policy, how to figure out the best companies to buy it from and more. Here’s what you need to know before you start shopping.
Table of Contents
- What Is Term Life Insurance?
- Who Should Get Term Life Insurance?
- What Are the Best Companies to Buy From?
- Isn’t the Life Insurance I Get Through Work Enough?
- Can You Get Term Life Insurance With No Medical Exam?
- What’s the Difference Between Term Life and Whole Life?
What Is Term Life Insurance?
Term life insurance is just what its name suggests. It’s a life insurance policy you buy for a certain number (term) of years. Typical terms include 10, 20 or 30 years.
But it’s not the kind of policy that you really buy for yourself; you buy it for your family, who would be the beneficiaries of the policy if you pass away.
Let’s say you had a two-year old child to provide for at the time you were buying a policy. You might select a 20-year term life policy to provide for that child and name your spouse as the beneficiary. The thinking is that by age 22, your child should be on their feet financially and able to provide for themselves in your absence.
It’s basically insurance to protect your loved ones financially when you die.
The nice thing about this kind of policy is that you pay the same amount each month. The premium never goes up once you lock it in. Of course, if you stop paying the premium, the policy lapses and you no longer have coverage.
But if you hold up your end of the bargain and pay every month as agreed, you have the peace of mind of knowing that your beneficiaries will receive a check if you die during the term of years you selected.
Who Should Get Term Life Insurance?
If you have children or a spouse who depends on the money you earn, you need term life insurance.
Likewise, if there’s a stay-at-home spouse in your life who cares for your children, you, too, need term life. If they pass away, you’ll have to pay someone to do all the child care that they did and the money from the policy can go toward that.
Remember, term life insurance is strictly for replacement of income. Should you die while the policy is in force, then your beneficiaries will receive a check to make up for the lost income you can no longer earn.
Therefore, it follows that if you have no financial dependents, you have no insurable need.
Here’s a simple rule: No financially dependent kids, no spouse, no significant other who depends on your paycheck? Then it’s no term life policy for you.
What are the Best Companies to Buy From?
There are two ways to determine the best companies to buy term life from:
- Check the A.M. Best rating
- Be sure you get multiple quotes
The first step to identifying financially strong companies is to check a company’s A.M. Best rating.
A.M. Best is a credit rating agency with a unique focus on the insurance industry. Their proprietary scores, which measure the financial strength of an insurer, top out at A++.
Money expert Clark Howard recommends buying term life only from companies that are rated A++ or A+ by A.M. Best. So even though A was a good grade in school, it’s not sufficient when you’re looking for a life insurer who will stand the test of time!
Once you’ve found some financially stable companies, it’s okay to treat buying coverage like a commodity or anything else you would shop for based solely on cost. Clark recommends that you buy 10 times your annual income in coverage.
Meanwhile, here are his favorite companies to buy from. As you might imagine, they are all strong on financial stability.
Isn’t the Life Insurance I Get Through Work Good Enough?
Some employers will offer you group life insurance on the job. For a low rate, you can typically buy anywhere from one to four times your salary in coverage in the event of your death. But this is not true term life insurance.
Instead, it’s what is called annual renewable term (ART) insurance. With ART, you get an insurance policy that covers you for one year. At the end of the year, you can renew the policy for another 365 days — usually at a slightly higher premium.
If you have access to a group life insurance policy through your employer, ART is most commonly what you’ll be offered. Think of it almost like buying a homeowners insurance policy a year at a time, except that it is on your life.
ART is only recommended when you have a short-term need for life insurance. Plus, the policies usually don’t offer very much in the way of a death benefit. Remember, money expert Clark Howard’s rule of thumb is to buy an amount equal to up to 10 times your salary, before taxes.
Can You Get Term Life Insurance With No Medical Exam?
Most traditional term life insurers will require you to pass medical underwriting before they’ll issue you a policy. However, there’s a new breed of online term life insurers who sell policies that don’t require a medical exam.
To qualify for one of these no-exam policies, you just have to answer questions about yourself and your state of health. Each insurer has its own parameters about who they’ll write a no-exam policy for. If you meet the criteria, you can get immediate coverage.
The nice thing about these policies is that they allow you to skip the scheduling of a nurse visit, all the needles and the waiting for your labs to come back. You can go online and get a policy in place in as little as 10 minutes if you qualify.
We’ve got a full explanation of how no medical exam life insurance works and some of the top companies to shop right here.
What’s the Difference Between Term Life and Whole Life Insurance?
Term life is not the same insurance product as whole life insurance. In fact, there are a couple of notable differences.
First off, with term life insurance you buy a policy for a set number of years, usually 10, 20 or 30, and the rate is affordable.
With whole life, however, you buy a policy that could in theory follow you from cradle to grave, just as the name suggests. The premiums on a whole life policy are much more expensive than those on a term life policy.
Meanwhile, term life just pays a death benefit to your beneficiaries in the event that you die when the policy is active. Nothing more and nothing less. Whole life is a much more complicated product. It builds up a cash value and is an investment vehicle — albeit with very high expenses — as well as an insurance product.
If you remember nothing else from this article remember this: Clark Howard recommends term life insurance. He does not recommend whole life insurance.
More than anything else, term life insurance offers peace of mind that your loved ones will be financially protected in the event of your early death. It is a simple insurance policy that just pays out a death benefit to your beneficiaries if you die while you’re still paying premiums.
Having a term life policy in place is critical if people depend on you financially. When you’re ready to buy, be sure to check out both our guide to the best life insurance companies and our step-by-step tutorial on how to buy term life insurance.