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So, what is term life insurance?
It’s the most basic form of coverage on the market. But do you know how it works and why we recommend our clients buy it?
There are many articles about life insurance, but unfortunately, many don’t start with the basics.
This is why I decided to write this blog. People need to be able to easily access information about one of the most significant purchases they make.
So why not start with the foundation of life insurance?
What is Term Life Insurance EXACTLY?
My Name Is James Heidebrecht, Founder of Policy Architects, and I LOVE Term Life Insurance
Term life insurance is one of my favorite products. But don’t get me wrong—permanent insurance works a charm for people in the right circumstances.
However, if you consider the needs of most people, most of the time, term life insurance usually meets those needs.
Why?
Because when you are relatively young and healthy, it’s super affordable.
Sure, permanent life insurance offers coverage until your death and gives your beneficiaries a guaranteed payout, but that does come at a price!
Unless you are considering final expense insurance, permanent coverage should only be considered by more affluent people who can afford the higher premiums.
So, let’s examine term life insurance in more detail to see what it offers.
The ABCs of Term Life Insurance
“No one needs to tell you why you should have life insurance: If you die and your family or anyone who depends on you for support could no longer count on your income, life insurance would replace that income—assuming you choose a policy with the amount of coverage that is right for you.”How to Shop for Life Insurance, Kiplinger.com
1. Term Life Insurance Provides TEMPORARY Protection
One of the most important things to understand about Term Life Insurance is that it provides temporary protection when you feel vulnerable.
Most people considering purchasing life insurance are looking for income replacement just in case they pass away early.
Clients are surprised to find out how much money it costs to keep their loved ones in the lifestyle they’ve become accustomed to. What if your income suddenly evaporates, never to return?
The average Canadian salary (2024) is approximately $70,000. If you work for 40 years, you’ll earn nearly $3 million over your lifetime. What happens if you die unexpectedly and all that potential income dies with you?
Financial devastation would ensue for most of us, which would mean a disaster for those we leave behind.
This is where term life insurance comes in.
2. Term Life Insurance Is Affordable
Purchasing term life insurance is like renting a home instead of buying one. Because your need is temporary, the cost is much more affordable than buying something permanent.
Term works a charm for families looking for income replacement because they can afford more coverage.
The amount of money you choose as a face value (amount of coverage) is tricky. While $100,000 sounds like a lot of cash, it’s not much when you factor it over time.
We recommend 10xing your income (take your gross income and times it by 10 to get the figure you need for adequate protection). For example, if you make $50K per year, you need at least $500K coverage to live comfortably. If you happen to have very young children, you may want to 15x it to be on the safe side.
$500K of permanent insurance is FAR more costly than $500K of term insurance. So, if you opt for permanent insurance on a tight budget, you will be underinsured.
3. The Most Affordable Term Coverage Requires a Medical Exam
You can get term coverage without a medical exam but shouldn’t avoid it to save money.
The more information you provide a life insurance company, the more affordable your rates will be. This is because life insurance is all about risk assessment.
If you get coverage without a medical exam, you are placed in a pool of high-risk applicants, which means your premiums are substantially higher.
Don’t get me wrong—there is a time and place for simplified issue policies, but traditionally, underwritten term life insurance is the way to go for most people!
Life insurance medical exams are straightforward. The nurse comes to your home and takes your weight and height. She asks you a few questions, takes urine and blood samples, and voila! It’s over.
Want some good news? Most people are healthier than they think. Although there’s a lot of anxiety that accompanies these exams, the majority of my clients are rated standard or better.
4. Selecting the RIGHT Term Is Important
A term is the period for which you need coverage. This is an essential part of the decision-making process when buying life insurance.
For the most part, I suggest that young, healthy clients start with term coverage to lock in great rates.
This protects them through their most vulnerable years and is super affordable. None of us know what the future holds, and it’s far more expensive to get coverage when you’re in your 50s and 60s.
However a long term isn’t always the perfect solution. Maybe you need to cover a debt that will be paid off in 10 or 15 years, in which case a 30-year term is overkill.
Some families pay down debt and don’t want more life insurance than they need. Clients like this can layer different term lengths – so excessive coverage drops as their debts decrease. This can save you a pretty penny.
Call a good independent life insurance agent to review all these details and ensure you select the correct term. It will save you time, money, and hassle.
5. Most Term Life Insurance Has a Conversion Option
What is a conversion option? It’s the ability to switch your coverage to a permanent policy when your term ends without a medical exam.
Why is this important? If you need coverage later in life, medical issues may make it excessively expensive—or you may even be denied. This is a great option to have if you need it. No one wants to be left without choices.
Term Life Insurance Definitions
Insurance agents assume a lot of knowledge, and you know what they say about that?
I think it’s because we are submerged in this stuff daily and forget that others aren’t. I am sharing some definitions for the terms I used throughout this article.
1. Life Insurance Term
Your term is the period you select that you feel will adequately cover your family if you die.
Typical terms are 10, 20, and 30 years, although variations exist.
2. Face Value
The amount of money you need to protect your family if they lose your paycheck.
Typical face values are $250K, $500K, and $1 Million, although variations are available.
3. Policyholder
The person who is being covered by life insurance. The face value is released to the Beneficiary if the policyholder dies during the term.
4. Beneficiary
The person who received the proceeds of a life insurance policy. The face value is released to the Beneficiary if the policyholder dies during the term.
You can have multiple beneficiaries or even make a charity a beneficiary.
It is essential to select the right person or organization for this role. Remember that there are limitations. For example, if you choose a minor to receive the funds, they can’t gain access until they turn 18.
Also, keep track of changes. It’s not unheard of for a divorced couple to leave their ex on a policy as the beneficiary.
5. Premiums
You pay this money monthly, annually, or lump sum for your coverage.
Your premiums are based on the rating you receive from underwriters.
6. Rating
When you take a medical exam, the blood work results, urinalysis, height, weight, and application answers are sent to an underwriter.
These professionals review the data and decide how much risk the company takes to cover you.
You are placed in a category that determines how much the insurer charges you for your premiums.
Here are the following ratings:
- Standard
- Preferred
- Preferred Plus
You can also be rated, meaning you fall outside traditional coverage and pay more. If the company needs more information, it may defer its decision.
You may be declined if they aren’t confident about your health.
7. Underwriters
Life insurance underwriters are the people who review your application and medical results to determine what rating you receive OR if the company should cover you at all.
Underwriters specialize in risk assessment and apply the processes specific to their life insurance company.
Remember that some insurers are more lenient than others regarding specific medical issues. All companies have niches, so underwriters know the ins and outs of their particular employer.
Now That You Know What Term Life Insurance Is, Call Policy Architects NOW
Term Life Insurance is the bread and butter of the life insurance industry because it typically works for most people most of the time.
This type of coverage is inexpensive, flexible, and suitable for those who need income replacement in case of an unexpected death.
However, it does not guarantee a payout to your beneficiaries. So, if you want to leave loved ones a nest egg, provide funds for final expenses, or create a trust, this isn’t the route for you.
If you decide term life insurance fits your needs, please consult an independent life insurance agent. Not all companies are created equal.
You want to select the best insurer for your personal needs. The savings could be in the thousands.
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