Term life insurance is one of the simplest life insurance products on the market. However, many people still have questions about what it is, how it works and why we need it. Here are answers to some of the most common questions.
1 – Who should get Term Life Insurance?
For healthy and fit individuals, term life insurance is almost always the most economical choice when you are looking for life insurance. In this case, economical means: the most coverage for the lowest price (premium). Keep in mind, that the price is not the same for every person applying for term life insurance. Your actual premium will be determined by several personal factors. We’ll talk more on that later.
So how do I know if I need it? Quite simply, you need life insurance if you have people that count on your income. People who would be left financially exposed if you were gone. Or, you might need it if you have debts that someone else would be held responsible for.
That sounds like just about everyone. So who wouldn’t need it? In many cases, people who have amassed personal wealth would not need coverage. Those that they care about would have their estate to count on. And typically, they would not have debts to be paid off. Likewise, many younger people that are unmarried, without dependents and without debt don’t really require significant coverage today, but many consider getting it younger so that they can lock in lower rates. The other reason that young people may consider coverage is to take care of matters if they plan to be assisting elderly parents financially as they age, or otherwise provide for someone else.
2 – Is there a single type of term insurance?
No, actually, there are different types of term insurance, level term and decreasing term.
With Level Term life insurance, you pay the same premium and have the same death benefit throughout the coverage period or term of coverage. Level term typically is sold in 10, 15, 20, 25 & 30 year increments. The longer the term, the higher the premium as your coverage extends to a later age in life. Logically, a person that was 25 and bought a 5-year term policy would pay less per month for their coverage than they would have had they bought a 30-year term policy and would be covered to age 55.
Decreasing term life insurance usually provides you with a premium that is constant, but the amount of coverage goes down each year (or every few years) as you age. Some people prefer this type of coverage, as their personal wealth grows over the years, their mortgage gets smaller or disappears, the kids have finished college, and their financial needs are far less.
3 – What does a life insurance quote mean exactly? Is it my guaranteed rate?
A life insurance quote provides a frame of reference. It is NOT a guarantee of coverage at a specific price. The reason? The insurance carrier is giving you an idea of what coverage could cost based on some high level assumptions, but they won’t guarantee that you qualify until they underwrite your case (which in layman’s terms means, until they have reviewed several factors that help calculate the risk of your death during the coverage – this is covered in question 4 of this article). After underwriting, the insurer will make a formal offer, which discloses the specific rate for which you have qualified.
Quotes can be provided on “various underwriting outcomes”. That sounds complicated, but it really isn’t. Carriers underwrite each person, and classify them based on whether they are a favorable risk (often called preferred class pricing), or they have complicated histories or worrisome risks, that cause the insurer to put them in “rated” or “substandard” class pricing. Applicants will fall into one of several underwriting “classes”. Each class, has associated pricing for the Age and Sex of the individual.
There may be 10 or more classes that are priced, but in a nutshell, they look something like this:
- Preferred Classes
- Standard Class
- Substandard Classes
The class naming is not important here as each insurer has their own naming conventions. Just understand that the “Average Joe” falls into a Standard Non-Smoker class. This class of applicant typically makes up more than half of the applicants with most carriers.
If you are not on medication, have a clean bill of health, and your family medical history is good, you will likely find yourself in one of the discounted classes above Standard Non-Smoker. On the other hand, if you have diabetes, a heart condition, high blood pressure or a combination of these or other factors, you’ll end up in the “Rated Tables” where you will pay higher premiums than the Standard Non-Smoker.
Are you curious what a quote would look like for you? Get your free no-obligation quote at MY LIFE COVERED.
4 – So how is a quote determined and a decision made?
A book, or several books could be written on this topic (and have been), but I’m going to keep the answer pretty simple.
COVERAGE REQUESTED –the coverage amount you request will affect the premium you will pay. The more coverage you require, the higher the premium will be. However, with most carriers, the higher the coverage is, the less it costs you “per $1000 of coverage”.
SMOKING STATUS – this is near the top for a reason. If you are a tobacco smoker (and they will know if you are), you are automatically moved into higher risk classes. There’s no explanation needed for this probably, as the incidence of health problems associated with smoking is well documented. The additional premium charged for smoking, from insurer to insurer, varies significantly.
AGE – because health risks increase with age, the older you are, the higher your premiums will be. After all, there is a significantly higher chance that a 75 year old will see this be their last year than there is that a 25 year old will, right? It isn’t hard to see why term life insurance for the young, fit and healthy is very inexpensive. Because health generally declines, the incidence of disease and risk of death increases as we age.
GENDER – Sorry guys, on average, women outlive you. And as such, all other things remaining equal, they will get cheaper rates for a longer period of time than a male will. *The state of Montana requires unisex rates.
BODY MEASUREMENTS – specifically, height and weight and perhaps some circumferences, which the insurer will use to calculate your BMI (Body Mass Index). Obesity is a key risk factor in determining our future health, so if your BMI is inordinately high, expect to be rated into a higher risk class.
** A special note here… BMI can be a poor measure of obesity in highly fit people. If you are fit, you can often prove to the insurer (and you should), that your weight is higher due to muscle mass versus inappropriate girth!
HEALTH – every life insurance company has their own standards, but if you request coverage of $250,000 or more (even less if you are over 30), expect that you will be asked to complete a medical examination which usually includes your blood pressure and heart rate as well as providing blood and urine samples for examination. Most coverage is priced on the basis of your individual risk and health is one of the primary determinants of risk class and thus price.
How healthy are you? A blood profile analysis can tell you a great deal. You can purchase a full blood workup, along with an assessment of the results, and it can be coupled with consultative sessions with a Dr. or Dietitian. The process is simple, your results are back to you normally within a week, and the fees are normally acceptable expenses of your Health Savings Account (HSA) benefit. To learn more, visit the MY LIFE COVERED blood test page.
LIFESTYLE – this is a somewhat nebulous catch all, as various insurers examine various sources of additional information to further inform them of your risk. You see, your health is a key indicator of mortality, but so are your habits and hobbies. For example, a person that skydives or scuba dives may very well see their premiums move into a more expense rate class due to the associated risk of their lifestyle choices.
5 – So will the price (premium) be the same from all carriers?
Not by a long shot. Every life insurer has their own experts, their own set of underwriting criteria, their own historical experience, and their own pricing models. All of these variations can lead to significant differences in pricing from carrier to carrier. It is always nice to see quotes from 3 or more carriers to get a feel for what is the best rate for you.
6 – Insurers have company ratings. Are these really important?
Ratings are an important factor, as they are the reviewing industries way of helping you know if a company is reputable, solvent and highly likely to be able to pay future claims.
Ratings range from A+ (strong) to C (relatively weak). We strongly encourage you to review an life insurers ratings as well as its products, riders and features prior to making a purchase.
7 – What’s the difference in “Term” and “Perm” insurance?
Again, term life insurance is incredibly simple. You pay premiums regularly, and you have coverage for the pre-agreed term of coverage for a low cost premiums.
Permanent life insurance is protection that will stay with you for life and does not have a term that could have expired before you die. Most permanent life insurance products offer a savings or investment component that accompanies the life insurance coverage. This makes them both more expensive and much more sophisticated.
So in plain English, what’s the point?
Life insurance is something that we all hope we will never need, but living without it may leave those we love financially exposed should the unexpected happen to us.
If you are yourself, fit and healthy, to apply for coverage at the lowest possible premium rates, you need to determine how long you expect to need insurance and purchase a term policy.
If you are someone who wants to feel like you are investing with all of your dollars, look into permanent products to satisfy your need for a nest egg, but realize, the cost will likely be substantially higher.
Would you qualify for the best rates? You won’t know unless you apply! But you can see just how inexpensive those rates could be by visiting MY LIFE COVERED.