Term life insurance explained: how much life insurance do you need?
When you choose to buy a life insurance policy, you will (generally) have a choice between two options: term life insurance or permanent life insurance. Life insurance buyers can find this decision difficult, but it all depends on a few factors. Term life insurance is for people who only need coverage for a specific period, such as until retirement or when their dependents are able to support themselves.
Whole life insurance, on the other hand, is designed for those with much longer-term financial planning goals, such as trust funding or estate planning. Term life insurance is generally inexpensive, while whole life insurance can be a bit more costly. This blog post is for life insurance buyers who choose to purchase a term life insurance policy.
What is term life insurance?
Term life insurance is an insurance policy that can be defined as an agreement between the insurer and the insured, stipulating that if the policyholder dies during the policy term, the insurer will pay what is called a death benefit to those designated as "beneficiaries" in the policy terms. This is true for all term life insurance policies. The main difference between term life insurance policies lies in the duration and the amount of coverage. As the policyholder, you must decide how much coverage you need and for how long.
Generally, the annual cost of term life insurance will remain the same each year for the entire duration of the policy. Once the "uniform term" period has ended, you can choose to renew your policy, but the rates will be higher for each year you choose to renew.
The policy ends or expires if you have exceeded the policy term and have not renewed it. If you die during this period, term life insurance can cover any specific debts you have that would otherwise be passed on to your heirs or loved ones, your loss of income to help support your children's education until they graduate, and even mortgage payments.
How much term life insurance do I need?
As with any insurance policy, the answer depends. The coverage you need should be sufficient to match the debts or obligations you want to cover. Essentially, you would want your coverage to be enough to pay for your family's current living expenses that would otherwise be covered by your salary in the event of your death. You can work with a life insurance broker to determine the approximate amount your family would need to live on as they currently do for the period you want to insure.
How much does life insurance cost?
Again, it depends. The cost of life insurance depends on the coverage amount and the term you choose. It can also be influenced by several or all of the following factors:
- Your age at the time of purchasing your policy
- Your sex
- Your health history
- Your current and past health
- Your height and weight
- If you are a smoker
- If you have a history of drug addiction
- Driving record
- Your hobbies – especially the riskier ones
- Credit score
The more likely you are to die during the term of your policy, the higher your rates are likely to be. For many policies, the most important factor is age. Insurance rates can increase exponentially over a decade, so it's advisable to purchase a term life insurance policy as soon as you have dependents who would be left without income or burdened with your debts if you were to die.
How long do I need life insurance?
As repetitive as it may sound, it depends. You choose the term of your term life insurance policy, but you might still want to work with a broker who can advise you personally based on your situation. You should consider how long you want coverage based on your outstanding debts, mortgage, and the number of years your children will be attending university or college. If your children are older and will finish their studies in eight or nine years, you could choose a 10-year term life insurance policy. On the other hand, if you've just bought a house and taken out a mortgage, you might want to choose a longer policy, between 15 and 30 years. Depending on the company, you may only have the option of choosing between 10, 20, and 30 terms, or you may have the option of selecting 5, 10, 15, 25, 35, or 40.
If you anticipate your family's financial needs will persist beyond the available lifetime options, a permanent life insurance policy may be worth considering. The most common policy term is a 20-year term life insurance policy, which accounts for approximately 42% of term life insurance purchasers.
Other life insurance options
Life insurance can be divided into three categories: term life, whole life, and universal life. When choosing between term and permanent life insurance, permanent life insurance buyers must also choose between universal and whole life insurance. Life insurance can be further subdivided, especially since some life insurance policies will cover certain obligations while others will not. For example, funeral expenses may be covered by a permanent life insurance policy but not by term life insurance, because term life insurance expires while permanent life insurance does not. If you have a child with special needs who requires lifelong coverage, you may want to consider a permanent life insurance policy.
As always, you can speak with a Panda7 life insurance broker if you have any further questions regarding life insurance.