What is Term Life Insurance and How Does it Work?
Are you new to life insurance and not sure where to start?
- Sample Term Rates by Age
- Life Insurance Needs Calculator
- How Long should My Term Be?
- How Do I Apply?
- Approval Process (Illustration)
- How Do I Apply?
…Don’t worry, we’re here to help!
What is Term Life Insurance and How Does It Work? For the cost and the amount of coverage, Term Life Insurance is the least expensive and most popular form of life insurance available.
With term life insurance, you can lock in a set amount of coverage for a set amount of time.
Term Life Insurance was designed as a way to provide monetary protection for dependents until their need for the protection is gone or minimized.
What’s A “Term?”
A “Term” is the amount of time the cost of life insurance is guaranteed to remain the same.
During the “Term” of a life insurance policy, a life insurance company cannot change the price of your life insurance policy, regardless of changes in your health. Common “Terms” for life insurance policies are 10, 15, 20, 25, and 30 years. The time periods are usually designed to protect someone’s dependents until a life event has occurred. To learn more about selecting the right term for your policy, please see our article; How of coverage please see our article, “How Long Should My Term Life Policy Be?”
What’s A “Face Amount?”
A policy “Face Amount” is the death benefit…the amount of tax-free money that your life insurance policy will pay out to your beneficiary if you die while insured. Much like the term, the “face amount” death benefit remains the same during the length of the policy.
If your need for coverage decreases as time goes on, many companies will allow you to reduce the death benefit at least once after the policy has been “in force” for at least a year. To learn more about selecting the right face amount, please read our guide/calculator. Common face amounts for term life insurance are anywhere for $50,000 of coverage to $10,000,000 and everything in between.
Case Example: Jeff and his wife Kathy just purchased their first home together and now they have a $400,000, 25 year mortgage. Jeff is the primary breadwinner for his family and he wants to make sure Kathy will be able to keep their home if he passes away before the mortgage is paid off. In this situation, a 25 year “term” with a “face amount” of $400,000 would provide protection for the mortgage until it is paid off.
Naming a Beneficiary
When purchasing life insurance, you will name your beneficiary/beneficiaries. A beneficiary is the person or persons you choose to receive you policy death benefit. When applying for life insurance, you will be asked about their “insurable interest”. In other words, how your death would cause them a financial hardship. Commonly this is a spouse or children, but can also be a business partner or someone who’s co-signed a loan.
After your policy is in force, the beneficiary can be changed, if you wish. This commonly happens with a divorce or other life changing event. You want to remain the “Owner” of your policy…..the Owner is the person who can make changes. In this example, if you allowed your former spouse to be your policy Owner, they retain all legal rights. Not a position most people want to be in.
There are many examples of insurable interest. This could be an immediate family member, a business partner, a co-habitant, a domestic partner, etc. Life Insurance can also be set up to protect an estate from taxes for future generations, or even as protection against a small business loan from a bank. If you’re not sure if your situation qualifies, feel free to call us and well see if we can help.
Insurable interest helps prevent money laundering, fraud and putting someone at risk. I had a situation where a guy met someone in a bar…they got to talking, probably over many drinks, and came up with an “idea” that they’d each take out $1 million of life insurance on each other. Whoever lived longest, would live well! I had to explain that life insurance is to protect someone from a financial loss, not create a windfall for an acquaintance.
How Much Will Term Life Insurance Cost Me?
Life insurance rates are based on a variety of factors, primarily your age, overall health, and occupation at the time of applying. As explained earlier, life insurance companies don’t come back and reassess your risk factors later, so they take a good look when assessing your initial application.
Life insurance underwriters will review your history of prescriptions, medical treatments, lab scores, and your build. If you are under age 65, you may be eligible for a policy without a medical exam. These policies are generally more expensive than a policy with a medical exam, since there’s more risk to the insurer by not running blood work and urinalysis. They’ll be making a decision based solely on information in your medical records and health may have changed since your last visit. If you decide to complete the medical exam to secure the most aggressive pricing, the results of your exam will primarily determine your rates. This guide is explains life insurance “rate classes”, and help you determine which classification you’ll likely fall in to. Our agents are very experienced at pre-qualifying clients right over the phone…give us a call, explain your health history and issues, and we’ll match you to the insurance companies best for your specific profile. This generally saves clients hundreds, if not thousands of dollars over the life of their policies.
In general, you may qualify for the #1 “Preferred Best rates if you’ve had no medical issues you’re your height/weight “build” are in recommended ranges. Some insurance companies are OK with blood pressure and cholesterol medications if they’re doing their jobs, and a couple carriers’ “build charts” are more liberal with age (“thank you”!). This is another reason to give us a call….we’re glad to share our experience and “insider’s knowledge” to save our clients money.
If you have a more serious health condition like diabetes, cancer history, or heart issues, look at the “standard” rate class as best possible. If you feel like your health is somewhere in between, or if you use tobacco products, please use this chart to estimate your rate class. For more information, feel free to read our article, “How Much Should I Expect to Pay for Life Insurance?”
Every Insurer Judges Your Health Differently
It’s important to understand every company has slightly different underwriting guidelines, which is why most of us with a few health considerations will find it best to speak with a licensed independent agent.
Let’s use myself as an example. I’ve had early stage melanoma. I was able to get a “standard risk” (average for a guy my age) with a couple companies, whereas the majority placed me two categories lower (about 20% higher cost) at a Sub-standard “Table 2” risk. As we’ve stated repeatedly, applying with the right companies will save you hundreds, if not thousands, of dollars over the life of a term insurance policy.
Tobacco use is another common underwriting issue. The majority of life insurers assess tobacco rates (about 50% higher than non-tobacco) no matter what form of tobacco you use. Industry insiders know there are some A-rated carriers which overlook an occasional cigar, or charge “non-smoker” rates for daily chewing tobacco users.
Our experienced agents are experts at life insurance pre-qualification underwriting. Knowing which companies have the best “underwriting niches” for each medical condition allows us to offer our clients their least expensive life insurance options in the nation.
How Do I Start The Process?
Purchasing term life insurance can be very easy. Once you have a rough idea of your rate class, how much coverage you need, and for how long, you’re ready to shop to find your best rate.
Our website is designed to help you get started… In just a few minutes you can compare rates from dozens of companies. Please click here to access our free, no obligation online quote. Better yet, feel free to call us at (855) 902-6494 for your free pre-qualification underwriting. We’ll help with the shopping, get an application, and available to answer your questions through the process. We’re here to help!
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