If you're in the market for life insurance, you might have been tempted by those ads claiming that "for just a few dollars a day, you can protect your family with $1 million in life insurance!" It sounds like a great deal, doesn't it? These ads typically refer to term life insurance. As its name implies, term life insurance provides protection for a limited amount of time - or a specific "term" of years, such as 10, 20 or even 30 years.
It's fairly simple; if you die while your policy is active, your family will receive a death benefit, but the many types of term insurance and options can be confusing. Is term life insurance likely to pay off for you? Start by asking yourself the following five questions.
1. What am I trying to accomplish?
Before you buy any kind of life insurance, think about why you're buying it. Are you protecting your family in case of an early death? Have you taken on additional debt that requires you to provide coverage? Are you looking to leave an inheritance to a charity?
Understand that in most cases, term insurance policies do not pay a claim - most people who buy term insurance "outlive" their policy's term. As a result, if you're shopping for insurance to protect financial obligations you may have for a very long time - possibly for the rest of your life - consider exploring another type of policy, called permanent insurance.
If you're in a cash crunch and have immediate obligations to your family, business partners, or lenders, term insurance can provide you with a quick, simple, short-term solution. (For more insight, read Buying Life Insurance: Term Vs. Permanent.)
2. What's available?
Most people will have access to at least one of the two types of term insurance policies: group or individual.
- Group - Most companies offer their employees some form of term life insurance as an employee benefit. This is called group term insurance, because you're getting protection as part of a larger group. Usually it's deducted right from your paycheck and the only requirement for coverage is to complete a brief questionnaire with details of your health history. Here are some of the advantages of group term insurance:
- It's easy - You can usually sign up for a policy when you take a new job and enroll in your company's benefits program. You may also have an opportunity to sign up during the annual enrollment period at your company; when you may sign up for other benefits, such as medical, dental, or an employer-sponsored retirement plan. (To learn about these employer plans, see Are You an Active Participant? and Common Questions About Retirement Plans.)
- No medical - Most group plans don't require a physical exam. A statement of good health, along with a medical history, is usually all that's required to secure coverage. (To read more, see Steering Clear Of Medical Debt and Health-y Savings Accounts.)
- Automatic payments - Through payroll deduction, you'll hardly feel the financial hit of paying premiums every month.
- Individual - As its name implies, an individual policy is one in which you apply for coverage on your own. You - or typically a family member - will own the actual policy. In order to obtain an individual policy, you'll probably have to undergo a medical exam of some sort, provide a detailed medical history, and give the insurance company permission to look into your medical records and perform a background check on any driving offenses and criminal activities. This might sound a little invasive, but there are some great benefits to owning an individual life insurance policy.
- It's portable - If you take a new job at a different company, you don't have to worry about losing your life insurance protection.
- Level premiums - Generally, individual policies can be structured to have level premiums for the duration of the policy; typically this is a 10-, 20- or 30-year period.
- Flexibility - If you ever want to upgrade or convert your term policy to a permanent policy, you might have more options available with an individual policy than you would with a group plan.
3. What if I don't die?
Ironically, some people who buy term life insurance get upset when they find out that if they don't die, they don't get anything back.
If this is a concern for you, it's important to get an understanding of what will happen to your policy as you near the end of the term.
- Premiums go up - Many term policies offer level premiums for several years (10, 20 and even 30 years, for example). As you approach the end of that term, you may have the option of keeping your policy. If you do, you can expect a hefty jump in your premium.
- Might need a new policy - If you are still healthy at this time in your life and you want to keep the coverage, it may be best to apply for a new policy.
- Drop in coverage - Perhaps you only wanted your policy to cover you as long as you had a mortgage, or until your children's college education was paid for. If that's the case and you have no other obligations to protect, you might want to let the coverage expire.
- Upgrade the policy - Most term policies come with a "conversion privilege". This allows you to essentially trade in your old term policy for a new permanent policy.
4. How can I upgrade this policy?
As mentioned previously, most term policies allow you to convert from a term policy to a permanent one. This is a great feature that provides future flexibility but because some policies have limitations, you should familiarize yourself with the conversion rules of any policy you're considering.
When can I convert?
The conversion privilege might have a time limitation on it, to age 70, for example. Some policies allow conversion during the entire term of the policy.
What can I convert to?
The most generous term policies allow you to convert to any type of permanent policy available, such as whole life, universal life, or variable universal life. Some term policies may force you to convert specifically to just one type, and some companies may not offer all types, which can also limit your options down the road. (Keep reading about this in Variable Vs. Variable Universal Life Insurance and What is the difference between term and universal life insurance?)
5. Where do I buy a policy?
Chances are you'll probably hit the major internet search engines first when looking for information about buying a policy. A number of online distributors can provide you with a term insurance policy. These distributors typically focus on finding the lowest cost policy, given the personal information you provide.
For a more personalized experience, you might consider finding a professional. An insurance agent will help you understand all the different variations of insurance - both term and permanent - and should be able to answer any questions you might have. You can find one by visiting any of the major company websites or combing through your local phone books, but probably the best way to find a representative is to ask around for a referral from a friend or business associate.
Finally, for group coverage, you can check with your employer. If you're self-employed, you may have access to a group plan through a professional association, or you may even be able to put a group plan in place for yourself and your employees.
After going through these five questions, you will be able to decide for yourself if that million-dollar coverage ad is really what you need to provide for you and your family. If it's not, don't be afraid to pass it by - there are hundreds of policies waiting to provide you with the peace of mind you're looking for.