Understanding the Basics of Term Life insurance
Buying Life insurance can be confusing and sometimes it’s hard to know what the right solution for you and your family is. I find that the first step to making the right decision, is to understand the basics. Below you’ll find answers to some of the most basic questions we’re often asked about Term Life insurance.
What is Life insurance? Life insurance is a contract between a life insurance company and a policy owner (You). A life insurance policy guarantees the insurance company will pay a sum of money to your beneficiaries when you pass away in exchange for premiums paid during your lifetime.
What is Term insurance? Term life insurance is designed to last a certain number of years, then end. You choose the term when you take out the policy. Common terms are 10, 20, or 30 years. Term is usually the most basic and affordable type of life insurance designed to cover you during the time in your life that you need it the most.
How do we determine how much insurance someone needs? It's not an exact science as each of our lives and families are different. An easy rule of thumb is 10-12x your gross income. OR we can use the DIME Formula to get more specific: DIME stands for debt, income, mortgage and education, four areas that you should account for when calculating your life insurance needs.
Debt and final expenses: Add up your debts, other than your mortgage, plus an estimate of your funeral expenses.
Income: Decide for how many years your family would need support, and multiply your annual income by that number.
Mortgage: Calculate the amount you need to pay off your mortgage.
Education: Estimate the cost of sending your kids to school and college.
What are other factors you should consider when choosing the right insurance policy for yourself?
Term: You may see 10, 15, 20, 30 or even 40 years. This is the duration that your term policy will be in force. After that? No more insurance. Term insurance is designed to cover you while you have a specific need. (i.e a 30 year mortgage or while you kids are young)
Heath Rating: You'll go through a health exam and questionnaire and based on the results you’ll get an overall health rating. Your premiums may increase or decrease based on the health rating, but don’t worry your premiums wont increase during the duration of your fixed term.
Tobacco or Non-Tobacco: This should be self explanatory that smokers will pay more for their life insurance because of increased risk of cancer and lung disease.
Insurance Company Credit Rating: Be sure to know what the overall creditworthiness of the insurance company you are purchasing your life insurance from is. To find out more you can check out any of the main credit agencies.
The main ratings agencies are:
A.M. Best: requires A.M. Best membership
Standard & Poor’s: requires free registration
Fitch: requires paid registration
Moody’s: requires free registration
As always, we're here to help you through the process. Please let us know if you have any questions at all!