Term Insurance At a Glance
As you look to make an important decision regarding the protection of your family, with the purchase of life insurance, here is a little information regarding term life insurance. Selecting a policy that is right for you requires more than just throwing darts at a board. It needs to be an educated decision.
As the name implies, term insurance provides protection for a specific period of time and generally pays a benefit only if you die during the “term.” Term periods typically range from one year to 30 years, with 20 years being the most common term.
One of the biggest advantages of term insurance is its lower initial cost in comparison to permanent insurance. Why is it cheaper when initially purchased? Because with term insurance, you’re generally just paying for the death benefit, a lump sum payment your beneficiaries will receive if you die during the term of the policy.
Term insurance is often a good choice for people in their family-formation years…
especially if they’re on a tight budget, because it allows them to buy high levels of coverage when the need for protection is often greatest.
Term insurance is also a good option for covering needs that will disappear in time. For instance, if paying for college is a major financial concern but you are sure that you will not need life insurance coverage after the kids graduate, and then it might make sense to buy term policy that will get you through the college years.
When deciding which coverage is right for you have to first consider your options and needs. First, there is the length of term. Then there is the coverage amount. Which combination makes sense for your life and monthly budget?
Here are a few important questions to think about when deciding a term insurance policy that’s right for you.
Is your salary the primary household income?
Are you carrying any debt?
Would you prefer to leave your spouse with little or no debt?
Do you have any children?
Do you have substantial childcare costs?
Do you plan to send your children to college?
Do you own a small business?
Do you have a mortgage?
If you answered ‘YES’ to most of these questions, then a flexible term life insurance policy might just be what you need to provide your family with peace of mind.
When considering the length of term, take into account your children’s ages. How long will it is before they graduate college? You want to make sure you are covered until they are on their own. For coverage amount, consider your current debts plus future expenditures in Nashville TN such as college tuition. Ask yourself, “What will it take to cover my family’s needs?”
A NOTE OF CAUTION! Be careful which term policy you buy and from which company. It is important to talk to a financial advisor before buying a policy. Too often I have seen people buy a policy on the internet or over the phone with an agent who does not really know all the characteristics of the policy they are selling. Convertibility of a term policy is VERY important in case you develop a health issue that may cause you to need the insurance protection for longer than the 20 or 30 year policy you bought. Term insurance costs are usually too expensive for most people to renew at the end of the term.
Many people only look at two (2) things when they are shopping for insurance. The first thing is always the price and sometimes, that is the ONLY concern. Some will ask about the financial strength and ratings of the company. Of course both are important, but there are also many other factors that a smart shopper should be looking for. The two most common rating organization are A.M. Best and Standard & Poors. You should look for the highest rating you can find, A+ is the highest. But there is also another ranking that has become popular especially since the problems our economy had back in 2008. It is called the “Comdex level”. It is a scale of 1 to 100 with 100 being the highest. The comdex rank is a measure of the companies overall financial strength. Obviously the higher – the better.
Next comes convertibility. Many insurance companies offer a conversion option, but to a whole life policy that was created decades ago – it is not updated to current mortality tables and interest rates. So in my opinion, not a good option. Many companies require you to convert the whole term policy. For example, if you had a $500,000 death benefit policy and you only want to covert $250,000 of it. Most companies won’t allow you to keep the remaining $250,000 in force. And most companies will only give a certain time period that you can convert the policy. Often that can be only during the first 5 years. Our research has shown that only 2% of the policies available today offer ALL these options. So what do you do now? Even worse, what if you already purchased one of those “other” term policies? Well, if your health has not changed significantly, I would recommend that you replace it with a policy from the 2%. If your health has changed, we should talk about it and explore your options.
What I recommend is that you buy your term insurance policy from an insurance company that also offers very competitive whole life or universal life products with living benefits. You want a company that allows you to convert any amount, at any time, to any of their permanent products. You want to be able to convert $250,000 to permanent and still keep the remaining $250,000 as a term policy, or as much term insurance as you want.
So there we have it. Have I totally confused you? Well, there’s one more thing I want to point out. Is term insurance the best option in every situation? I think not. Remember, term insurance (or as I like to call it, temporary insurance) is designed to cover a person’s life for a certain term period. If there is a need to have coverage for longer than 30 years, then you should be looking at permanent life insurance like Whole Life or Universal Life. However, I will discuss those options in another post.
So… hopefully I have given you enough ammunition to head out into the wilderness of term insurance shopping. But I would be remiss in reminding you that I am a financial/insurance advisor and I represent close to 50 of the top insurance companies – including the 2%.
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