How Does Term Life Insurance Work?

18:36 18 April in Life Insurance, Term Insurance

How does term life insurance work? Term life Insurance, or term insurance for short, is an insurance product that provides a death benefit for a set period of time. Common term lengths to choose from are 10, 15, 20, and 30 years terms.  If you die within the term, the proceeds of the life insurance policy go to the beneficiary of your choice. Below is an example that will help to clarify how term life insurance works and the process of obtaining a policy.

1. Getting a Quote

As an example, Greg is a married 29 year old with a newborn child. He is interested in getting a term life insurance policy to protect his family in the event of his death. Greg can go directly to an insurance company and will receive a quote from just that company. Or he can go to an insurance broker and receive quotes from multiple companies so as to compare them. For this reason it is advisable to go to an insurance broker when shopping for term life insurance. Term life insurance quotes are based on age, health, term length desired, and death benefit amount desired.

2. Choosing a Term Length

Greg has a wife, a newborn child, and also a 30 year mortgage. In choosing a term length, he would like a term policy that lasts for the duration of his mortgage. He also hopes to one day send his child to college and potentially graduate school, so he wants the policy to last at least until his child is an adult. Therefore, a 30 year term policy seems like a good term length. If Greg dies at some point within the next 30 years the death benefit will go to the beneficiary of his choice, which in this case is his wife Kimberly.

3. Choosing a Death Benefit Amount

Greg is the main breadwinner of his family. He currently makes $100,000 a year. After assessing his financial situation including his income amount, outstanding debt, junior’s educational costs, and potential final expenses, he decides that he should have a policy with at least $1,000,000 of death benefit. Here is a needs assessment test to take if you are considering term life insurance. Greg’s insurance broker presents him quotes with 30 year term lengths with a death benefit of $1,000,000. The best quote comes in at $700 per year, assuming that Greg is in good health. Keep in mind that the pricing and the financial stability of the insurance company are both important factors to consider when shopping for term life insurance.

4. Underwriting Process

Greg decides to pursue the policy at which point the broker sets him up with a paramedical exam. The paramedical exam can be taken at his home, his work, or wherever he chooses. It includes a blood test, and a urine test. The results are sent to the insurance company. The insurance company may also request doctor records.

5. Policy Approval & Delivery

Once Greg is approved the policy is issued and the broker delivers it to him in exchange for the first premium amount, which in this case is $700. Keep in mind, you can opt to pay the premiums monthly if you would like.

6. How Does Term Life Insurance Work?

Once the check is received, the coverage is bound. Greg’s premiums are level at $700 per year for 30 years. As long as he pays the premium every year his $1,000,000 of death benefit is in force. If he dies within the 30 year period, the $1,000,000 will go to his beneficiary. If he does not die within the 30 year term the policy ends after year 30. At that point, if he wants to get a new policy he will need to reapply and go through underwriting again.

7. Know Your Rights

Many term policies can be converted to whole life policies within a certain amount of time with no additional underwriting required. You can change the beneficiaries of your term life insurance policy at any time. You can also drop your term life insurance policy at any time. For instance, if you buy a 30 year term policy you are not required to keep the policy for the entire 30 year term. There is no penalty for dropping a policy. Once you discontinue paying premiums the policy terminates and there is no death benefit coverage. However, if you do wish to keep the policy for the entire 30 year period, the premium amount is level and will never increase during the entire term length. You can add another policy at any time. As your financial needs change you can buy another term life insurance policy. It is a good idea to review your coverage to maintain the proper amount of life insurance.

8. Term Insurance is Relatively Inexpensive

It is very important for young families that have not been able to accumulate a lot of savings to buy term insurance.  Often, a term life insurance policy costs less than it costs to buy a cup of coffee per day. Proceeds from the policy create an estate for the benefit of the surviving spouse and children.

At Secure Term Insurance we are insurance brokers offering free quotes and personalized service with step by step guidance throughout the application process, underwriting process, and any assistance you may need thereafter.

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