If you die while other people are depending on your income, a term life insurance policy can be a financial lifesaver.
Life insurance presents a lot of questions and uncertainties, especially if you’re not sure who to trust. That’s why I wrote this article: to answer your questions and make sure that you get the best life insurance for your needs.
Table of Contents
- What Is Term Life Insurance?
- How Does Term Life Insurance Work?
- The Term Length and Coverage Amount That Clark Recommends
- Term Life Insurance vs. Whole Life Insurance
- Best Term Life Insurance Companies
What Is Term Life Insurance?
Term life insurance is an insurance policy that guarantees coverage for a period of time, usually from 10 to 30 years.
The policyholder pays monthly premiums. And in the event of their death, the policy pays out a death benefit to the beneficiary.
Sometimes called “level term life insurance,” the premiums remain the same throughout the duration of the policy.
This type of insurance is designed to provide coverage for a set period of time when the policyholder is earning money on which other people depend.
If you’re paying a mortgage and your spouse depends on your income to do so, for example, you may need term life insurance. Or you may consider buying a policy if you’re raising children and want to make sure their financial needs are met should you pass away before they’re grown and self-sufficient.
How Does Term Life Insurance Work?
Term life insurance is flexible. Often the term length options run 10, 20 or 30 years. Some companies offer 15-year and 25-year policies.
Policyholders can choose the term length and coverage amount that best fit their needs.
For example, if you have young children, you may choose a 20-year term life insurance policy to provide them with financial support through college age. If you just signed a 30-year mortgage and you’re roughly three decades from retiring, a 30-year policy may be better suited for you.
The length of the term impacts the cost of the policy. Longer terms generally are more expensive than shorter terms.
Traditionally, life insurance policies have required extensive in-person medical exams. There’s a growing wave of instant-issue policies that run your information through actuarial databases to determine your risk profile and offer you insurance without a medical exam.
These types of policies offer convenience but typically pad the price to a degree to account for the additional risk. So they tend to be more expensive.
A number of factors determine the cost of your premiums including your age, gender and health — as well as the insurance company you select.
Once you get approved for the policy you want, you’ll name a beneficiary. Assuming that you keep current with your payments, your beneficiary will receive the full amount of your benefit if you die before the policy ends.
The Term Length and Coverage Amount That Clark Howard Recommends
Determining the proper term length and coverage amount for your life insurance policy is part art and part science, governed mostly by common sense.
First, let’s talk about the length of your policy:
Let’s say you’re buying term life insurance to ensure your children are taken care of in case you die unexpectedly. But your children are 18 and headed to college and you expect to retire in five years. In that case, you probably don’t need a 30-year policy. A 10-year policy would give you excellent coverage.
Next, let’s talk about the amount of coverage you need:
The death benefit should be enough to cover your financial obligations such as paying off a mortgage or the cost of education for your kids.
This part of the equation is more straightforward, especially if you want to follow the advice of money expert Clark Howard. He recommends coverage that’s equal to 10 times your current salary. So if you’re making $80,000 a year, you may want to set your benefit amount at $800,000.
Clark thinks 10 times your salary is a healthy amount to account for inflation over the life of the term, especially for a 20-year or 30-year policy. However, if you feel like getting complex, you can adjust that amount up or down slightly based on the financial needs you want to cover and how close (or far) you are from being able to self-insure.
Term Life Insurance vs. Whole Life Insurance
Buying life insurance sounds like a great idea. But if you’re not an insurance expert, your head can spin within a few minutes of research.
That’s doubly true if a pushy insurance salesperson is trying to move you into whole life, universal life or variable life insurance. Those types of life insurance policies are much more profitable for the salesperson and the insurance company.
These other types of life insurance are filled with complexities often designed to increase the profitability for the insurance company. Many times, they weave in complicated investments and a layer of confusing rules buried in fine print even a lawyer could struggle to understand.
Clark thinks it’s better to buy level-term life insurance on your own and online.
Whole life insurance premiums are much more expensive because — as the name implies — you’re covered for your whole life rather than for a specific time period with a term policy. The premiums often are variable and increase over time.
Term life insurance is much simpler and less attractive to insurance companies attempting to squeeze out maximum profits.
You can often convert a term life policy into a whole life policy if you decide you want to down the road. Although that isn’t necessary under typical circumstances.
Best-Term Life Insurance Companies
The best term life insurance companies are financially secure. You don’t want to pay expensive premiums for 20+ years only for the company to fail when you need it.
Clark’s second major rule for life insurance is to only buy from a company that’s rated A+ or A++ from A.M. Best. That’s a credit rating agency that specializes in judging the long-term financial viability of insurance companies.
“As long as you use that as the criteria, buy from the cheapest A++ company there is,” Clark says. “It doesn’t matter if it’s a name you’ve never heard of or anything like that. As long as they have the financial strength standard, whoever’s cheapest is who you buy.”
Aside from the A.M. Best rating and the price, you may want to consider a company’s customer service track record and whether it offers additional policy options (called “riders”).
The National Association of Insurance Commissioners (NAIC) website offers a complaint index score for each company. This can also be a good resource to check out when you are selecting your policy.
Want to protect those who depend on you financially? That seems like a sensible decision. But don’t get caught in a spin cycle of insurance confusion.
Term life insurance is the easiest and best way to achieve your goal.
You want your benefit to equal 10 times your annual salary. And you want the term length to coincide with the time you’d want to insure your income.