Buying a term life or a combination of term and permanent insurance may help you pay a lower premium. Buying a policy early in life is also a good way to ensure a lower premium. The older you are, the higher the premiums, and the more risk you have of developing a health condition that could increase your premium even more, or disqualify you from getting coverage at all.
Premium rates are typically based on factors such as age, gender, height, weight, health status (including whether or not you use tobacco), and if you participate in high-risk activities or occupations.
Permanent policies are typically the best option if you are looking for life-long protection, or an option to accumulate a tax-deferred cash value. A portion of the premium of a permanent policy is used to build up a cash value. The cash value can be used in several different ways, including allowing you to take out a loan against the cash value, or paying your premium after your policy is fully paid up.
If you already have a policy, it will usually have a lower premium rate than a new policy you would buy. If you’re buying a permanent policy, the cash value will also be smaller for several years. Keeping all these factors in mind, it might be worth considering a new policy if you have any significant changes in your life circumstances, such as if you:
- Are recently married or divorced
- Have or adopt a child (or became a grandparent)
- Have children or grandchildren who are about to enter college
- Provide care or financial help to a child or elderly parent
- Receive an inheritance
- Retire (or your spouse retires)
- Start a business
- Change or lose your job or salary
“Fully paid up” means that you have paid enough premiums to cover the cost of the policy for the rest of your life, and the company will use the cash value to pay your premiums until you die.
Most policies have a 31-day grace period wherein you can pay the premium with no penalty or interest. If you have a term policy and do not make the payment within this grace period, the insurance company will usually terminate the policy. If you have a permanent policy, you can authorize the insurance company to draw your premium from your policy’s cash value.
Most policies have a contestability period of two years after you buy the policy. During this time, if the insurance company finds that they issued the policy under misrepresentation or withholding of information by you, they can declare your policy void.
Some term policies have a return of a premium feature that allows for a refund of all or some of the premiums you paid through the term of the insurance if no death benefit was paid. The premiums for policies with this feature tend to be higher, and you must be careful not to miss any payments throughout the term in order to take advantage of this feature.
Some policies have a provision that allows you to collect a significant portion of the death benefit while you are still alive should you become terminally ill. The money can be used at your discretion to pay for medical expenses or even to do specific things with your family and friends while you still can. The amount you take out early will be subtracted from the death benefit payment along with interest.
Term insurance plans cover you for a term of one or more years, and it pays a death benefit only if you die in that term. However, even if you don’t die within the term, you have not wasted your money any more than when you buy car insurance but never have an accident. You have bought yourself peace of mind that your beneficiaries will receive the death benefit if you should die within the term. Term policies typically offer the lowest monthly premium and are usually the best option if you have a limited budget or a temporary need. You can typically renew term policies for one or more terms even if your health has changed, however each time you do so, the premium may be higher. There are four kinds of term policies:
1. In level term policies, the amount of the death benefit will remain the same for the entire term. Depending on the policy, your premiums may be level, or may increase over the term.
2. Decreasing term policies have a death benefit that decreases over the term. Your premium will typically remain the same throughout the term. People who purchase decreasing term policies usually have financial obligations that decrease over time (such as a mortgage payments or loans).
3. Annual renewable term policies have a death benefit that remains the same throughout the term, but a premium that increases.
4. Convertible term policies allow you to convert the policy into a permanent policy, typically without a medical exam or further underwriting. Generally this does increase your premium payment and must be done before you reach age 65.
To determine how much life insurance you need, it’s best to look at your surviving family’s immediate, ongoing, and future financial obligations, and compare that with your financial resources. Below are examples of each type of need:
Immediate: funeral costs, medical bills, taxes.
Ongoing: mortgage payments, utilities, food.
Future: college tuition, retirement funds.
Financial resources can include your partner’s income, savings, income-producing assets, and investments. Considering all these obligations and resources, the difference between the two is how much life insurance you need.
Most plans do require medical testing and charge premiums based on the level of risk they assign to you based on the testing. However even if you are not in top health or have a serious health condition, there are still some options available with guaranteed issue plans, although this comes at the cost of a higher monthly premium and a lower death benefit.