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Understanding life insurance

March 04, 2019

Is term life insurance right for you?

Looking for affordable, temporary financial protection for the people who depend on you? Term life insurance might be the answer.

Think life insurance isn’t for you? You may want to think again. Whether you’re married, single, childless or a parent, if there are people in your life who rely on you and could face financial hardship without you, you may want to help protect them with life insurance.

But what about the price for that protection? Generally speaking, there are three basic types of life insurance: Term, permanent (or whole life) and universal life (which is a kind of permanent insurance that also includes an investment component).

Let’s talk about term. If you’re looking for something budget-friendly, term life insurance may appeal because its annual or monthly costs (called premiums) are typically lower to start with than permanent life insurance.

Sounds good, but is term the right fit for you? Here’s what you need to know before you buy:

How does term life insurance work?

Let’s say you want affordable protection to cover a temporary but large financial obligation, like a mortgage, a business loan or your child’s education. Buying a term life policy would mean choosing the term that covers the time you need the coverage. This could be five, 10, 20 or more years – the length of your mortgage, the duration of your loan or the amount of time you expect to need to support your children. During your initial term, your premiums are guaranteed to stay the same.

But what happens when your term expires? A feature called renewability lets you continue your coverage for another term at an increased cost (due to various factors including your being that much older than you were when you first bought your policy). With this feature, you won’t need to provide new or additional health or medical information, but you’ll still have to contend with the price hike. While term life insurance is flexible so you can adjust your coverage to suit your changing needs over time, it doesn’t provide lifetime coverage like permanent or universal policies do.

Plus, the death benefit – the amount of money paid or due to be paid when you die – remains the same as long as you continue to renew. Basically, the death benefit is money paid, tax free, to your family or whoever you name as your beneficiary(ies).

Is there a way to minimize term insurance rate increases over time?

Worried about rate increases under a term-life renewal? Most term insurance policies have a convertibility feature that lets you switch to permanent insurance without having to re-qualify by giving new medical information.

How can changing to permanent insurance help? Permanent life insurance comes at a higher price, but the policy stays in effect and the premiums stay the same, no matter your age or health. So what looks like a higher insurance cost now, with permanent, may end up being lower in the long term than renewing your term several times.

What about life insurance through your employee benefits?

Buying life insurance through your workplace benefits is often cheaper than buying it as an individual, since you get the financial advantages of group coverage. However, you need to make sure you’re getting enough protection. Ask yourself whether your group policy will cover your share of your family’s expenses or financial obligations. If you think you may need more, reach out to your human resources department to see if you can buy more coverage through your employee plan.

You should also remember that your workplace insurance isn’t a lifelong guarantee. It doesn’t go with you if you change employers, it ends when you retire or leave your job and it can increase in cost every time you move into a higher age bracket. This is why you may want to consider buying individual life insurance that will stay with you regardless of your employment situation, and top it up with group coverage through your employer.

Talk to an advisor about your life insurance options

To develop the best plan to protect your family and your estate, you need to understand the different kinds of life insurance coverage available and the benefits they offer. Perhaps your needs are simple and you need just one type of insurance. Or your situation may be more complex, and you may need more than one type.

  • Do you know how much life insurance you might need to protect the people who depend on you? Try this Life insurance calculator for a quick estimate.

With so many options, it can be tough figuring out what’s right for you. An advisor can walk you through the potential advantages and benefits of a life insurance policy. He or she can also explain how you can combine individually owned insurance with other coverage you may have at work or as a member of an association. So if you need some advice, don’t hesitate to reach out to an advisor for help.

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