The process may be confusing and frustrating if you’re shopping around for life insurance. You’re not alone—life insurance can be an extremely complex product that confounds consumers nationwide. However, many families discover that term life insurance is a relatively simple policy that fulfills all their insurance needs.
Term life protects a specified number of years, ranging from one to 30. If the policyholder dies sometime within the term, their family receives a death benefit. These policies are less expensive because they are designed solely for protection. Many people choose term insurance because they figure the need for life insurance will decrease as they get older. Term insurance is also a good option for those who want to protect their children until they are young.
Although this may seem pretty straightforward, there’s much more to term life insurance. Here are four things you need to know about term life. As you shop around for a term life policy:
1. Figure out your objective
Before you start shopping around for a term life policy, or any life insurance for that matter, you must ask yourself what you’re trying to accomplish. Depending on your goals, term insurance may not be suitable for you. Most people who buy term insurance outlive the policy’s term—which means they never receive the payout. However, if you want to protect your family and ensure your debts are paid off should you die within the next few years, term insurance may be the perfect solution.
2. Understand group vs. individual
There are two types of term life insurance policies: group and individual.
Most companies offer group term life as an employee benefit. Typically, all you have to do to apply is complete a short health history questionnaire. Unlike individual plans, most group plans don’t require a physical exam. The premiums are automatically deducted from your paycheck each month if you qualify.
With individual life policies, you apply for coverage independently and are the policy owner. You must undergo a medical exam and provide a detailed medical history to apply for an individual policy. You may also have to sign an agreement allowing the insurer to examine your medical records and perform a background check.
Although obtaining an individual life policy may seem more complicated and somewhat invasive, these policies offer many advantages over group policies. For one, a separate policy is yours to keep. If you lose your job or decide to switch employers, you don’t have to worry about losing your life insurance protection. Additionally, individual policies usually offer what’s called “level premiums.” This means your premiums will not increase throughout your procedure (usually 10, 20, or 30 years). Whereas rates on group policies typically increase every five years.
Individual policies are also much more flexible than group policies. For example, if you decide to upgrade your policy or switch to a permanent one, you’ll have more options if you own an individual one.
3. Devise an end-of-term plan
As your policy nears the end of the term, you have a few different options, including the following:
- Let the coverage expire: If you feel that life insurance is no longer necessary—because your children are grown and your debts are paid off—then you may want to let your policy expire.
- Keep the policy: If you still want coverage, you may consider keeping it—but it’s essential to realize that your premiums may jump significantly if you extend the term. However, this may be your only choice if you still want coverage but know you can’t qualify for a new policy due to health problems.
- Get a new policy: If you are still healthy, you may apply a new approach to avoid increasing premiums on your existing policy.
- Upgrade: If your term policy includes a “conversion privilege,” you can upgrade it to a permanent policy.
4. Know how to upgrade
If you upgrade your term life policy to a permanent one, you must read the fine print on your term contract. Your policy may contain a time limitation if it includes a conversion privilege. For example, once you reach age 70, some policies may not allow you to convert to a permanent policy. However, other plans will enable you to alter them anytime during the policy term.
You should also find out what kind of policy you can convert. While some term policies allow you to convert to any permanent policy (including whole life, universal life, or variable universal life), others may force you to convert to one specific type of policy.
Finding the ideal life insurance policy can be a daunting task. However, as long as you keep these tips in mind, you should be able to locate the best policy that will give you and your family peace of mind.