A term life policy is exactly what the name implies: Coverage for a specific term or length of time, typically between 10 and 30 years. It is sometimes called “pure life insurance” because, unlike whole life insurance, there’s no cash value to the policy. It’s designed solely to give your beneficiaries a payout if you die during the term. Show
Most individual term policies have level premiums, so you pay the same amount every month. When the term expires, there’s no more coverage – you either have to go without or get a new policy, which will likely come at a higher cost: the older you are, the more expensive it is to get a policy. However, many providers – including Guardian – will allow you to convert a term policy to permanent life insurance for part or all of the coverage period. If you receive term life insurance through an employer, rates are typically issued “on attained age,” which means the rates will increase over time. This calculator can help you determine the cost of term life insurance at the coverage level you want. How many years will your family need financial protection? For most people, it’s until the kids are grown up, the house is paid off, and there’s some money that can serve as a safety net for the surviving spouse. Whole life insuranceA whole life policy is the simplest form of permanent life insurance, providing coverage that lasts your entire life. Like other permanent policies, it includes a cash value component: A portion of your premium dollars are placed into a cash value account, and this sum grows over time on a tax-deferred basis, so you don’t pay taxes on the gains.3 Compared to other forms of permanent coverage, a whole life policy has three defining characteristics:
Cash value provides several significant benefits you can use while you’re still alive. It takes a few years to grow into a useful amount, but once that happens, you can borrow money against it, use it to help pay your premiums, or even surrender it for cash to live on in retirement.5 When you get a whole life policy from a mutual company, such as Guardian, your cash value can also earn annual dividends6. You get a portion of the insurer’s profits, which can be used to increase the value of your policy and provide other benefits. While not guaranteed, Guardian has paid a dividend to its qualified whole life policyholders every year since 1868. Whole Life vs. Term Life InsuranceKey differences between term and whole life insurance include:
Universal life insuranceA universal life policy is another form of permanent insurance that offers the cash value and lifetime coverage benefits of whole life. But there’s a fundamental difference compared to whole life: the premiums are flexible. With a universal policy, you can raise or lower the amount you pay into the policy as you see fit, within the limits of the policy. Paying in less could eventually result in the need to pay in higher amounts in later years to keep your coverage. This type of policy can adjust to your life circumstances while providing the same kind of cash value growth as whole life. Having another child, moving on to a different job, or taking out a loan to buy a business – all might be instances where a combination of security and flexibility becomes important. Final expense insuranceFinal expense insurance is a form of life insurance intended only to cover end-of-life expenses such as funeral and burial costs. The coverage is permanent in the sense that if you keep paying premiums, the policy will remain in effect, but there is no cash value or investment component to these policies. Older people often buy final expense coverage without dependent children because it helps protect loved ones who might otherwise have to cover these costs out-of-pocket. While the premiums for these plans tend to be modest, the death benefit is also very limited – it’s not meant to provide years of financial support to your beneficiaries. Younger, healthier people who want to build cash value or a significant death benefit for their families will likely be able to find greater value in a whole life, universal life, or term life policy. Simplified issue and guaranteed issue insuranceMost life insurance policies are underwritten: they require a medical exam as part of the application process so that the provider can assess your risk to insure. Simplified issue and guaranteed issue policies don’t require a medical exam. These plans are primarily designed for older applicants or those with serious health problems who may not qualify for policies that require a medical exam. Some term policies and most final expense policies are either simplified issue or guaranteed issue. When applying for a simplified issue policy, you’ll be asked to fill out a health questionnaire in place of an exam. With a guaranteed issue policy, you won’t be asked to undergo an exam or complete a questionnaire – no medical information is needed to qualify for approval. These policies typically offer lower levels of coverage compared to other types, and premiums tend to be higher because the insurance company has to assume that there’s a high risk to providing coverage. Group life insuranceThis is life insurance that you buy as part of a group – typically through work as part of your employee benefits package, or via a member organization. Most group life insurance is term, but some companies also offer permanent coverage as a voluntary (employee-paid) benefit. Until recently, individual policies – bought through agents or directly from insurance companies – were the most common way to get life insurance. Now, more Americans are covered by employment-based group policies. These plans offer relatively affordable premiums because the company or organization is effectively “buying in bulk.” Some employers even provide workers with term coverage equal to 1x their salary at no cost to the employee. Group policies may also be simplified issue, at least for lower coverage amounts, which helps employees with health issues obtain coverage. On the other hand, coverage amounts can be limited. Group life may not provide the comprehensive coverage you want, but it can be an easy, affordable way to start or supplement your life insurance protection. If available, find out if the policy is portable: that means that if you leave your job, you can take your coverage with you. Term life is typically less expensive than a permanent whole life policy – but unlike permanent life insurance, term policies have no cash value, no payout after the term expires, and no value other than a death benefit. To keep things simple, most term policies are “level premium” – your monthly premium stays the same for the entire term of the policy. Here are three key questions you should answer before you get a policy: How a term life insurance policy worksIt’s a contract. At its most basic level, a term life policy is an agreement between the person who owns the policy (the owner) and an insurance company: The owner agree to pay a premium for a specific term (usually between 10 and 30 years); in return, the insurance company promises to pay a specific death benefit in cash to someone (a beneficiary) upon the death of someone else (the insured). That benefit is usually tax-free (unless the premiums are paid with pre-tax dollars). There’s an application process. You may have seen or heard ads that say things like, “A male non-smoker in his 30s can get a 20-year $500,000 term policy for under $30 a month.” Some people can get that much coverage for under $30 – but it’s not automatic. Before they give you a policy, the provider needs to assess how much of a risk you are to insure. This is called the “underwriting” process. They’ll typically ask for a medical exam to evaluate your health, and want to know more about your occupation, lifestyle, and other things. Certain hobbies like scuba diving are deemed risky to your health, and that may raise rates. Likewise, dangerous occupational environments – for example, an oil rig – also may raise your rates. You need to choose a term length. One of the biggest questions to ask yourself is, “How long do I need coverage for?” If you have children, a popular rule of thumb is to choose a term long enough to see them out of the house and through college. The longer your term, the more you’ll typically pay each month for a given coverage amount. Nevertheless, it usually pays to err on side of getting a longer-term policy than a shorter one because you just never know what the future holds and it is generally easier to get insurance while you are younger and in good health. Decide how much of a death benefit you want. You should consider getting enough coverage to care for your family’s needs if you’re not there to support them; in section 3 we’ll tell you a few different ways to figure out how much that is. Whatever coverage amount you need, it will likely cost less than you thought: A recent survey found that 44 percent of millennials believe that life insurance is at least five times more expensive than the actual cost.1 Name your beneficiaries. Who gets the benefit when you die? It doesn’t all have to go to one person. For example, you could give 50% to your spouse and divide the rest between your adult children. And while beneficiaries are typically family, they don’t have to be. You could choose to leave some or all of your benefits to a trust, a charitable organization, or even a friend. The different types of term policies you can buyAs you shop around and start talking to companies or insurance agents you may hear about different kinds of term policies. They all provide a specific benefit over a specific term but may have very different bells and whistles and costs.
One more thing to look for in a term policy: Convertibility Convertibility is a policy provision that lets you change your term insurance into a permanent whole life policy later on – without having to get a new medical exam. It’s a feature offered by almost all major insurance companies that let you change your type of life insurance. Guardian, for example, lets you convert level term insurance coverage at any point in the first five years to a permanent life policy – and even offers an optional Extended Conversion Rider which lets you do so for the duration of the policy. 2 Why would you convert to a whole life policy from term? If you’ve had a serious health problem – for example, a heart attack – it may be very difficult to get another policy. Another reason: you’re attracted to the cash value component of a whole life policy. Or maybe you want permanent life-long coverage. A term policy may well be your best choice now, but things can change. Look for an insurer that offers the option to convert from term to a whole life policy without taking another medical exam, which would likely increase your cost. The chart below lists some of the important differences between a term life policy and whole life insurance, but if you want to find out more, talk to an insurance agent or financial representative.
How to determine the amount you need – and where to get itIf you have a young family, it will take many years of income to pay to feed, house, clothe, and educate your children through to adulthood. If you’re not there to provide for them, life insurance can help with those costs – but you have to make sure your policy’s death benefit is enough to do so. Here are a few general rules people use to help determine how much they need:
Any of those methods is a good start, but it also makes sense to talk with an experienced professional who can guide you through the process of calculating your actual need. Where to get term life insuranceIf your company offers group life insurance as part of your employee benefits package, that can be a great place to start. Because the company is buying for a large group of people, the premiums are typically lower than for an individual policy. Your employer may also subsidize a portion of the premiums or even provide coverage equal to your annual salary at little or no cost. On the other hand, the total amount of coverage you can get may be limited, for example to three times your salary. And if you leave the company you could lose your coverage. Even if you have some coverage thorough work, it may not be enough for your needs. The good news is, term life insurance is generally easy to shop for: Many companies, including Guardian, will give you an instant online quote. Compare insurance rates from a couple of sources, and before you make a choice consider the company you’re buying from. You’re looking to have a long-term relationship with that company, so look for the following qualities.
Another way to compare insurance companies is by looking at online customer reviews. While these aren’t likely to tell you much about a company’s financial stability, it can tell you how easy they are to work with, and whether claims servicing is a problem. Want to talk things over with someone before you buy term insurance? That’s a great idea. Guardian can connect you with a financial representative who will listen to your needs, tell you about the best ways to meet those needs within your budget and types of life insurance policies available, then will help you decide. Whichever way you decide to buy, consider doing it soon. Remember: the longer you wait to get life insurance, the more you’re likely to pay. |