How Much Term Insurance to Buy?

Term life insurance simply means that it is valid for a fixed number of years, or term. The insurance provider will pay out the death benefit if you die before the term expires (another way of saying death benefit payout). The insurance provider does not payout the death benefit if you die after the term has expired. The recommended term length to purchase is a 15–20-year term strategy. If you have a family or loved ones who depend on your income, then you need life insurance because no one is invincible. Life insurance allows you to care for your loved ones ever after you’re gone. Everyone can agree that it’s not a pleasant thought to have. Taking the time to sort it all out now, on the other hand, is a million times smarter than leaving your loved ones stranded if you were to die unexpectedly.

How Does Term Life Insurance Work? 

Term life insurance is a legally binding contract between the policyholder and the insurance provider. A term life policy, in its most basic of forms, is an arrangement between the individual who owns the policy (the owner) and an insurance company. 

The owner agrees to pay a premium for a fixed period (usually between 10 to 30 years). In exchange, the insurance provider offers to pay a specific death benefit in cash to someone (a beneficiary) upon the death of someone else (the insured). This advantage is typically tax-free (unless the premiums are paid with pre-tax dollars).

Application process. You’ve probably seen or heard advertisements that say something along the lines of, “A 30-year old female nonsmoker can get a 20-year $500,000 term policy for less than $30 a month.” Some people can get that much coverage for less than $30 a month, but it is not automatic.

Before providing you a policy, the insurer must decide how much of a risk you are to insure. This is known as the “underwriting” method. They will usually request a medical test to assess your health and will want to learn more about your profession, lifestyle, and other factors. Certain activities, such as scuba diving, are considered dangerous to your health, and this may cause rates to increase. Similarly, hazardous work conditions will also affect your rates.

How to choose a term length. One of the most important questions you can ask yourself is, “How long do I need coverage for?” If you have children, a good rule of thumb is to select a term that will see them through college and out of the home. The longer your term, the more you’ll usually pay per month for the same amount of coverage. 

However, it is normally better to be on the side of having a longer-term policy rather than a shorter one. You never know what the future holds and it is typically easier to get insurance while you are younger and in good health.

Determine how much of a death advantage you want. You should consider having enough coverage to provide for your family’s needs if you are unable to help them. Whatever level of coverage you need, it will almost certainly cost less than you anticipated. According to a new study, 44 percent of millennials believe life insurance is at least five times more costly than the real cost. 

Create a list of the beneficiaries. When you pass, who do you want to receive the death benefit? It does not have to all go to one person. For example, you might give half to your spouse and the rest to your adult children. Beneficiaries are usually family members, although they do not necessarily have to be. You have the choice of leaving any or all your benefits to a trust, a charitable organization, or even a friend.

What Are the Types of Term Life Insurance?

This is where most people will do the majority of their research. First, take a moment and think premium and payout. To get the best of both, you’ll want to know the breakdown of all of these different types of term life insurance.

Level Premium

Level premium term life insurance ensures that the premiums remain constant regardless of the duration of term you choose (we recommend a term of 15-20 years). It is the most basic form of life insurance since the premium and death benefit sum do not adjust until you have it in place. This is why financial planners prescribe level premium term life insurance plans. Any time your premium is due, you know exactly how much it will cost and can factor it into your budget. 

Annual Renewable Term

Often referred to as an annual renewable term and is like a level premium policy. This policy protects you for a year at a time, with the option to renew without a medical examination for the term’s length. The premium amount changes every year before the term expires to cover the rising cost of insurance. The amount it rises is determined by the insurance provider as they assess your “risk” at renewal time each year. As compared to a level term policy, the premiums would be marginally lower at first, but you will pay more over the course of a 10, 20, or 30-year term.

Return of Premium

This seems to be a decent deal on paper because it is expected to compensate you for the expense of the policy if you live to the end of the term. If that happens, then your insurer will refund all or a portion of your premiums. However, your premiums could be 2-4 times that of a standard term policy – averaging around 30 to 40 percent higher. Besides that, if your financial situation changes and you let your policy expire, you may only receive a portion of your premiums back – or none at all. At the end of the day, this term policy may not be worth it if you’re just paying more in the first place. 

Guaranteed Issue or Simplified

A guaranteed or “simplified” term life insurance policy is one that does not require a medical test. Instead of a full examination, you will only need to complete a medical questionnaire. Because of this, these type of term policies are simpler to obtain. However, there is a catch.

Premiums can be extremely high, often more than double the cost of a standard term life policy. That’s because, in the absence of medical examinations, all the insurance provider has to go on is your age and the fact that you’re looking for non-medical insurance. This means that the insurance provider will assume you are a high-risk prospect with health issues. You will then be classified as “higher than normal risk” and as a consequence, you will be paying a higher-than-average premium.

Convertible

Another policy feature to look for in a term policy is convertibility. Convertibility allows you to convert your term insurance policy into a permanent whole life policy later. You can do this without having to take a new medical test. It is a feature provided by almost all major insurance firms that allows you to adjust the form of life insurance you have. 

Why choose this? If you have had a major health condition, such as a heart attack, it might be difficult to obtain another policy. Policyholders are also drawn to the cash value aspect of a whole life insurance policy. Or perhaps you want coverage that will last your whole life. A term policy may be your best option right now, but things may change. 

Look for an insurer that allows you to convert from a term to a whole life policy without having to take another medical test, which will raise your premium. If you want to learn more, speak with an insurance provider or financial representative. They can provide guidance through summarizing the main distinctions between term and whole life insurance.

So, which type of term life insurance should you choose? Many experts suggest that a level premium term life policy is the best choice for you out of all the options available. With this type of policy, you will receive coverage that is 10–12 times your salary for a period of 15–20 years. You would have a fixed premium and death insurance payout. This is life insurance with no frills or needless extras.

How Much Term Life Insurance Should You Buy?

When purchasing term life insurance, key considerations are how much do I need and how many years into the future will my income need to be replaced? Even if $100,000 seems to be a large amount, how can you be confident that it is sufficient? When deciding how much term life insurance to buy, there are several factors to consider. Research what factors to consider when choosing life insurance and how to determine how much coverage you will need.

There is no definitive response to the question of how much coverage is adequate. According to some financial advisors, you should purchase enough life insurance to replace five to seven years of your earnings. But what if you have young children or are deeply in debt? That estimate may not be adequate. According to this calculation, if you receive $60,000 a year, you should buy at least $300,000 in life insurance coverage.

Many people put off purchasing life insurance because they believe they cannot afford it. In this situation, term life insurance is always a more cost-effective way to get the coverage you want. However, you also need to find out how much. Remember that the primary goal of life insurance is to replace your income in the event of your untimely death. You are helping your dependents to maintain their current standard of living as much as possible. Consider the following questions.

1. Does your surviving partner have enough money to survive with, pay off debts, and cover child care expenses without you? 
2. Do you have other assets on which he or she can draw to cover these costs, such as immediate cash for funeral and burial expenses? 
3. Since term life insurance is intended to meet your needs for a fixed time span (typically 10 to 30 years), ensure that the duration you are choosing is compatible with the number of years your dependents may need it.

How many years will your income need to be replaced in the future? In other words, will funds be required until your spouse finds a job, retires, or dies; until your child’s college graduation; or until some other milestone is met? 

Then take your annual salary and multiply it by the number of years you estimated earlier. 

Consider your debts next. What is your total debt (mortgage, car loans, credit cards, other loans, etc.)? Finally, don’t forget to deduct the value of your current savings, pensions, pension plan (if you have one), and any existing life insurance.

Using these formulas and statistics, you will get an idea of how much term life insurance you would need. There are also many useful life insurance calculators available. You can also work with a licensed life insurance agent who can provide a comprehensive needs analysis. Regardless of you preferred method, you’ll need these numbers calculated for an agent to review or input them into a life insurance calculator. 

The Bottom Line

You probably already know how we feel about life insurance. Its sole aim is to substitute your income if you die. It exists to provide for your loved ones, not to make them wealthy. You can do it all yourself if you stick to a plan and spend wisely. Keep in mind that your life insurance needs do not always determine how much you can afford. So, how much term life insurance do you need? 

At the end of the day, you want to make sure you’ve spent enough, but not too much, in a life insurance policy. You’ll need to shop around if you want to get the most life insurance possible. In most cases, the number is 25 times your annual salary. It will always feel good to know you have a plan in place to protect your family. One step towards that goal is having enough term life insurance. If you’re ready to get covered, begin shopping for and comparing term life insurance rates.