Life insurance is often an important part of any financial plan. Its purpose is to protect the wealth you’ve worked hard to build. It can save a family from having to gut a retirement plan or sell a house after an unexpected death.
The main types of life insurance are term life, whole life insurance and universal life insurance. And within each of those types are further varieties. With so many life insurance options, you can likely find a policy that suits your specific needs. The array of choices can also seem overwhelming at first, but keeping a focus on the reasons you need life insurance will help you pinpoint the right type.
Term life insurance is a contract between a policyholder and an insurance company that says if the insured person passes away within the time period of the policy, the insurer will pay a death benefit to the beneficiaries named on the policy.
If you’re buying term life insurance, you have two main decisions to make: How long the term should be, and how much life insurance you need.
With level term life insurance, the annual cost of the insurance remains the same every year for the term period. Once the level term period is over, you can generally renew the policy, but at higher rates each year you renew.
If you outlive the length of the policy without renewing, the policy expires. There is no refund of what you’ve paid in, unless you bought a policy type called return of premium term life insurance.
Many people buy term life insurance for income replacement. They’re looking for life insurance that will provide funds for a family to pay expenses for a certain number of years if they were no longer there to work and earn money. Term life is also good for:
To choose the best length for a term life insurance policy, consider the length of the debt or situation you want to cover. For example, if you’re buying term life to cover the years until your children are through college, and that’s in nine years, you might pick 10-year term life insurance. If you just bought a house and took on a 30-year mortgage, you’re likely looking at 30-year term life.
Term life insurance is typically available in lengths of 5, 10, 15, 20, 25 and 30 years. Some companies are venturing into longer terms. For example: 35 years (available from insurers AIG and Legal & General America, which owns Banner Life and William Penn) and 40 years (from Legal & General America).
The most common term life length purchased is 20 years, says Steve Robinson, Vice President of Partnerships for Legal & General America.
If your family’s financial needs stretch past the typical term life lengths, you should consider a permanent life insurance policy such as universal life insurance.
Length of policy | Percent of term life buyers |
20 years | 42% |
10 years | 25% |
30 years | 15% |
15 years | 12% |
Annually renewable (year by year) | 5% |
Source: Milliman |
A good term life insurance amount is generally one that matches the debts or obligations you want to cover. For example, the top reason for buying life insurance is “income replacement,” according to the 2019 Life Insurance Barometer report by industry groups Life Happens and LIMRA.
This means the insurance is intended to pay a family’s expenses that would have been paid by the person’s salary. If income replacement is your goal, calculate the approximate amount your family would need to maintain their standard of living for the time period you want to cover.
Many term life insurance shoppers request quotes for $1 million in coverage, but ultimately land on buying coverage in the $500,000 to $600,000 range, says Robinson of Legal & General America’s customers. Coverage amounts vary by location, he notes. For example, someone in New York City, with a higher income and higher rent or mortgage, will typically need more life insurance than someone in Sioux Falls, South Dakota.
There are many free online calculators to help you zero in on a good life insurance amount. It’s good to try out a few to get a range of recommended amounts. For example, Life Happens, MassMutual, and Prudential have online calculators.
Read More: How Much Life Insurance Do I Need?
Along with the life insurance amount and term length that you choose, expect these factors to affect your rates:
Rate examples for 20-year, $1 million Term Life Insurance
Male | Female | |
Age 30 | $455 | $356 |
Age 35 | $491 | $409 |
Age 40 | $698 | $579 |
Age 45 | $1,124 | $865 |
Age 50 | $1,741 | $1,288 |
Age 55 | $2,824 | $2,060 |
Age 60 | $4,936 | $3,446 |
Rates are for healthy non-smokers, of average height and weight. We averaged the five cheapest quotes we found online. |
When you have a quote that you like and are ready to buy a policy, you’ll fill out an application. The life insurance agent will likely go over your application answers. You may be asked to sign releases, such as one for your medical records.
Once the application goes to the insurance company, you may be asked to do a life insurance medical exam. This often includes height, weight, blood pressure, blood and urine samples, and questions about your prescriptions and health to verify the information on the application.
Depending on your age and/or amount of insurance requested, a life insurer might also request an EKG or cognitive assessment.
Behind the scenes, the life insurance company will be doing its own research on you. This often includes:
“Level term” is the most common form of term life insurance. It’s the type that offers premiums that don’t change during the years of the policy length that you choose. Other types are:
Annual renewable term: With this type your premiums goes up every year, although you choose a period of insurability that guarantees you won’t have to reapply. It may be good for people who want to close a short gap in life insurance, but a short level-term policy is likely a better choice.
Decreasing term life insurance: Here your premiums stay the same over the length of the policy but the death benefit decreases steadily over time. Mortgage life insurance is a form of decreasing term life. The payout is tied to the declining balance of the mortgage, and the beneficiary is the mortgage lender, not your family. Regular term life insurance is a better bet because your family receives the payout and can use it for any expense they choose.
Return of premium term life insurance: This policy type promises to refund the premiums you paid in if you outlive the policy. As you can imagine, the refund feature makes the policy more expensive. Return of premium term life is available from companies such as AAA Life Insurance, State Farm Life and Vantis Life.
At the end of the term of a term life policy, the policy will expire unless you renew it. “Level term” life insurance guaranteed your rate for the term length. After that, you likely have the option to renew the policy each year but you’ll pay a higher rate. It could be much higher.
If you still have a need for life insurance at the end of the term life policy, get quotes for a new policy before you pay the higher renewal rate. Even though you’re older and may be less healthy, you could still find a better deal in a new policy.
One of the great things about term life insurance is that it gives your beneficiaries financial flexibility. They can use the payout for any financial priority, whether it’s paying routine living expenses or funding college tuition.
Life insurance types such as credit life insurance and mortgage life insurance give your family no flexibility because the life insurance payout goes to the lender or creditor, not beneficiaries you choose.
If you no longer have a need for life insurance, and don’t anticipate one in the future, you might consider stopping payments.
The key is being confident that you no longer need life insurance, whether you have term life, whole life insurance or another type. If you end a policy and your life circumstances change later, you could regret not having kept the policy.
Term life insurance policies contain no cash value. It’s one of the reasons that term life is usually the least expensive way to buy life insurance coverage.
If you want a policy that builds cash value, consider whole life or universal life insurance.