Last Updated: June 21, 2010
Term insurance is a cost-effective solution when there is a short-term need for insurance. Generally speaking, term insurance policies have a guaranteed level premium for a predetermined period of time and if the insured dies while the policy is in place, the death benefit is paid to the stated beneficiary. The following is a checklist of items to consider before purchasing term life insurance.
How Much Coverage Do I Need?
Rules of thumb exist when it comes to determining the amount of coverage required but each individual’s needs vary. A more formal analysis centered on what you own, what you owe, your existing insurance, and your financial goals for your family will lead to a more accurate number. The most common financial goals as it relates to life insurance include:
- Funding children’s education, including private school and college.
- Establishing a fund to pay final expenses.
- Creating supplemental income for a surviving spouse.
- Leaving a legacy by creating an estate with life insurance.
- Cancelling any debt including the mortgage.
- Donating to a charity — religious or non-profit.
Various tools are available on popular personal finance web sites and a qualified finanial planner can assist you as well. Determining the amount of coverage required is considered by many to be the most important part of the process.
How Long Should the Coverage Last?
One should select a term length that is in line with their financial goals. Most carriers offer policies designed to last five, 10, 15, 20, 25 and 30 years. Policies with longer terms are more expensive than policies with shorter terms. Err on the side of caution by selecting a longer term than what may be currently needed. Flexibility is good and it is better to have coverage last a few more years than have coverage suddenly stop.
Convertible Term Insurance Provides Additional Flexibility
Many term insurance policies include an opportunity to convert the term insurance to permanent forms of coverage without medical underwriting. When comparing multiple policies, be sure to compare conversion features and understand which products you can convert to. If one becomes uninsurable, having the ability to convert to permanent life insurance without medical underwriting is extremely valuable.
The Medical and Financial Underwriting Process
Life insurance carriers do their due diligence before issuing a life insurance policy. Most carriers require a medical screening before an offer is made. Exact underwriting requirements vary by carrier and are also based upon the amount of coverage desired. Medical underwriting practices usually include a questionnaire that outlines your health during the last several years, physical measurements, and blood and urine tests. Larger policies may require a treadmill test or electrocardiogram (ECG). The carrier will also make sure that the amount of coverage requested is appropriate from a financial perspective given your current financial situation and your personal and professional responsibilities.
What Else Should I Know?
Conducting regular reviews of your insurance policy is part of a prudent plan. A review will help ensure the amount of coverage remains appropriate and serves as a reminder as to how many years are left before the term policy expires. It is also a good idea to compare pricing of an existing policy to pricing for a new policy. Finally, if replacing existing life insurance, never let the old policy lapse before the new policy is in effect.