Understanding the types of term life insurance
Posted in Life Insurance 101 last updated on November 29, 2023We all know there are many types of life insurance. However, is all term life insurance the same? What are the different policies on the market and how to select which one is best suited for you and your family? In this article, we will outline the different types of term life insurance, the application process, and coverage to help you select the right policy plan for you. This is a comprehensive guide outlining everything there is to know when it comes to term life insurance.
What we would cover
Is all term life insurance the same?
If after reading the article you have any questions or would like us to review your personal situation, simply reach out to us. Life insurance is ALL we do.
Prior to jumping into the topic, we wanted to take a second and advise you that life insurance needs to be customized. There is no one-size-fits-all when it comes to protection. Therefore, it is essential to work with a life insurance broker who has access to several different companies and plans.
Ok, let’s dive in...
Term life insurance 101
We felt it’s extremely important we start here: explaining what is term life insurance. In a nutshell, term life insurance is temporary coverage. In other words, you select a plan’s duration and coverage amount. The company charges you a monthly rate called a premium. During the policy duration, your monthly premium would stay the same, and should you pass away the company will pay out the death benefit you selected.
Q: How long does term life insurance last?
A: The duration of term insurance could be 10, 15, 20, or even 30 years. One thing to keep in mind is that the longer the duration, the higher the monthly premium would be. This is due to the fact that the company will be guaranteeing your coverage at this rate for longer, and essentially there could be a greater chance of you passing away and them having to pay out the death benefit.
Q: When does term life insurance make sense?
A: Term life insurance is best suited for temporary needs. The most common scenarios are paying off the mortgage, taking care of the kids while they are financially dependent, or income replacement.
Q: What is the drawback of term life insurance?
A: We often tell our clients to think of term life insurance as renting an apartment. While you pay your monthly premium you have a roof over your head or in other words coverage. Should you stop making payments the coverage cancels and you will no longer be protected. Term life insurance builds no cash value and in most cases, you do not receive your premium back should you cancel the plan.
Q: Why buy term life insurance?
A: One key advantage of term life insurance is the price. Term life insurance is very affordable and allows the insured to select a higher coverage for a relatively low monthly premium.
Is all term life insurance the same?
Okay, now it’s time to answer the question: is all term life insurance the same? As you probably guessed, the answer is NO. There are different types of term life insurance policies on the market today and you must select the one that makes the most sense for you and your family. We have divided the different types of life insurance into several categories.
Application process
In this category, we will list the different types of application processes when selecting term life insurance. Please note that due to health and or lifestyle history, not all options are available to you:
Instant decision / online application:
This is the easiest way to apply for life insurance. You can go on your smartphone or computer, and complete the application entirely online. You will answer simple questions and you can get a decision on the spot.
It does not get any easier than that!
Many companies are employing AI or artificial intelligence when designing apps to apply for life insurance. You can go from a quote to a policy in less than 15 minutes.
Here are the two companies you can apply to and see if you qualify:
No medical exam life insurance:
This option, similar to the one above, will not require a medical exam. In other words, you will not have to meet with a nurse, give blood/urine samples, and wait for the results. The difference is that with no medical exam life insurance, you would need to complete the application with an agent over the phone. The agent will ask you several health and lifestyle questions. Then the company will review your application and they can approve, decline, or ask for additional information.
Please note some companies can issue a decision as early as the same day, while others could take up to two weeks or more.
A key thing we would like to point out is that not every company has a no medical exam life insurance option. More companies are leaning in that direction, and are relying on third-party data when assessing eligibility. However, most companies on the market today will require a medical exam. This is the third option for applying for life insurance.
A full life insurance application with a medical exam:
This simply means that you will have to schedule an appointment with a nurse to get your vitals (blood sample, urine sample blood pressure reading height, and weight).
Please note that we will help you schedule the medical exam and the nurse can come to your home place of work or you can go to a location closest to you.
Another thing we would like to point out is that there is no cost for you when applying for life insurance with a medical exam. In other words, you do not pay for the medical exam.
A typical process of a life insurance application with a medical exam would be:
- Applying with an agent
- Scheduling the medical exam
- The company reviews the exam and assesses if additional information is needed such as a copy of your medical records from your doctor
- After all of the information is received the company will review it and it will make its final decision
- Please note that this process could take up to 4 to 6 weeks from start to finish.
Type of Coverage
In this category, we would outline the different types of life insurance coverage.
Traditional life insurance
Typically, when someone thinks of term life insurance they have in mind this type of coverage. Traditional life insurance covers not only accidental death but also covers should you pass away from any illness or natural causes. When approved, the plans start day 1 coverage. In other words, you do not have to wait for the coverage to take effect, and should you pass away even on week 1 of taking out the life insurance policy, the plan will pay out the death benefit to your beneficiary.
Accidental life insurance
This plan will only pay out should you pass away due to an accident. Please note that according to the CDC, accidents are one of the leading causes of death of people under 40. Accidental life insurance would not pay out should you pass away due to natural illness and therefore it is very well priced.
Here are scenarios when you might consider an accidental policy:
- As a supplement to already existing coverage
- If you are in a high-risk occupation, such as a truck driver
- If you are not able to qualify for traditional life insurance, due to health or lifestyle history
Guaranteed issue life insurance
These types of life insurance ask no health or lifestyle questions. In other words, everyone is accepted. Some of the most common restrictions are citizenship and the ability to make your own decisions. Because there are no questions asked, there are some big limitations when it comes to guaranteed issue life insurance. The biggest one is that typically there are two or even three years of a waiting period. If you pass away in the first two policy years, the beneficiary would receive either the premium payments back plus a small interest or only a percentage of the death benefit.
Also, these plants are the most expensive term option available.
Lastly, these types of plants limit the available coverage amount to $20,000 or $50,000. However, for some clients, this could be the only option they have to secure life insurance to protect their families.
We advise our clients that some coverage is better than none. Even though this plan has limitations and full coverage does not start until after the second policy year, you are not losing your money. Should you outlive the waiting period, you would have some coverage in place.
Policy features to consider:
In this category, we will outline how the traditional term plans are different. Many of them have additional features that enhance the product and could make it more valuable to you:
Duration of the plan
As we mentioned above, you can select a term life insurance policy that is locked in for 10, 20, or 30 years. Some companies however only offer 10 or 20-year plans. Only a handful of companies can offer 35-year plans. When discussing your needs and selecting the right plan we often ask our clients about their goals and based on that we can make a recommendation for the duration of the plan.
Convertibility
Life is unpredictable. What you need today could dramatically change and will call for us to reevaluate your life insurance needs. For example, if you select a 20-year term policy and you have another child 10 years into the policy, you may want to extend your existing plan or try to apply for a new one. However, if your health or lifestyle has changed in between you may not be eligible. This is when the convertibility option will come into play. Convertibility simply means that you are able to convert or exchange your term life insurance for a permanent life insurance plan with no health questions asked.
Please note that not every life insurance policy is convertible and that it does not make sense for all plans to be converted. We are strong advocates of having options, as we can not always plan for what’s ahead.
If you have any questions on convertibility, please feel free to reach out to us and we will gladly assist you.
Riders
Riders in term life insurance are additional features that enhance the life insurance policy. Some of the riders are built-in while others could be added for an additional cost. Think of riders as a way of customizing your life insurance policy to better fit your needs. Some of the most common riders available in a life insurance policy are:
Child Rider – Typically for a small monthly fee you are able to add coverage for your children as well. 1 rider covers all eligible household children for the same death benefit. The cost of the rider varies based on the coverage amount. Typically for $20,000 coverage on each child, the total monthly cost is $5 to $7.
Please note one rider covers all children between the ages of 15 days and 17 years old at the time of application.
Accidental rider – This is an additional rider that can be either built into the policy or added on for an additional cost. Accidental Rider provides additional death benefits should you pass away because of an accident. For example, if you die due to a car accident the life insurance policy can pay out an additional $250,000 on top of your existing death benefit.
Waiver of disability payment – There are several names for this rider, however, it essentially will pay the life insurance premiums should you become disabled for a period of time. Please note this is not disability income insurance. The rider pays only the premiums of your life insurance policy. In most cases, there is a small charge to have this rider added to your policy.
Living benefit riders
Living benefits also referred to as accelerated benefits riders allow you to use your life insurance while you’re still alive. In other words, you do not have to die for the policy to pay.
We’ve dedicated several articles on living benefits and answered some of the most common questions about the riders and whether we believe it is worth it for you to have living benefits in your life insurance. However, we wanted to provide you with some of the basics, so you can decide if it makes sense for you to explore further.
You can file to accelerate your policy if you are diagnosed with a qualifying medical condition. Living benefits are built into the policy and with most companies, you do not have to pay an additional premium. However, not many companies offer living benefits and they could be very different amongst the carriers. There are 3 categories based on the conditions that they are qualifying you under:
- Critical illness – you can qualify for acceleration under this category if you have been diagnosed with invasive cancer, stroke, heart attack, etc.
- Chronic illness – you would be able to accelerate your life insurance under the chronic illness rider if you are unable to perform at least two out of the six activities of daily living.
- Terminal illness – this is the most common living benefit rider. The majority of the companies have some variation of it built into their products. You can file a claim against your life insurance benefit if a certified doctor confirms that you are expected to die within the next 12 or 24 months.
A very important note we would like to make is that the money you could be receiving under living benefit riders is coming from your death benefits. For example, you have a $500,000 life insurance policy and you would like to accelerate half of it if your remaining death benefit would be $250,000. How much you would receive today will be based on an actuarial discount and the severity of your medical condition.
Please understand that the livings are best suited if used for life-changing qualifying medical conditions.
Price of the life insurance
There are thousands of life insurance companies on the market today. While most of them are similar in pricing each has its own algorithm when calculating your life insurance rate. Each company puts different weight on different factors and therefore you can fall into a different health category between different companies. What we mean is that one company can charge you significantly less compared to another company simply because of the way they calculate their health categories.
Therefore it is more than essential to work with a life insurance agent that it’s not an employee of any company and can give you unbiased advice on your best option. Our job at One Stop Life Insurance is to ask you about your health, medical, and lifestyle history. Based on your answers and our experience we can advise you of the best company you can apply with.
In conclusion,
There are many types of life insurance policies available on the market today. The key is to take the time and understand what are your needs and what is most important to you. We understand that shopping for life insurance it’s not fun and nobody wants to plan for dying. However, we also understand that having a plan in place would make our family’s life easier and we believe it is worth it to take the time to explore and select the right plan for your family.
Thank you for taking the time to review our guide and please reach out to us should you have any additional questions.
Thank you!
