illustration-people

Term Life Insurance

Smart Tips

Life insurance is an essential part of any financial plan. It’s a good idea to check in on your insurance once a year to be sure that your coverage is adequate, and that your premiums are competitive.

It’s wise to renew life insurance before the end of your current term to secure a lower price for your premium.

Can you save money and still protect your family with term life insurance coverage?

Most people are familiar with the concept of life insurance—a tool to provide money to family or others you care about at the time of your death. But many people don’t understand some of the details of insurance that can save them money while still ensuring their families are protected.

The most common form of life insurance is term insurance, meaning the insurance covers you for a certain period of time, typically 10, 15, or 20 years, or until age 65.

Term insurance can be used to replace the income lost when you die. The amount of insurance is usually based on your income multiplied by the number of years your family would require that income. It can also be used to cover specific expenses such as paying off the mortgage.

The premium (the cost to buy insurance), is based on many factors including your age and health status, the length of the term and the amount of insurance you want to obtain. In general, premiums are more expensive as the likelihood of redeeming the insurance increases.

Renewing Your Term Life Insurance

In some cases, the cost of your insurance premium can be reduced by renewing before the end of your term. Because premiums are based on the risk that the insurance company will need to pay the insurance, the cost to insure rises as your risks increase. You can keep your premiums lower by renewing when you are younger and when you are healthy.

For example, let’s say John bought a 10-year term for $500,000 when he was 40 for a premium of $33.43 per month.

John is 47 now, and his insurance is up for renewal in three years. At 50, if John were still insurable, he would pay $221.97 per month for $500,000 in coverage. But at 47, if he is still in good health, he would pay only $62.68 for a new 10-year term. So if John renews now, he would pay that lower premium for the next ten years.

Let’s take this example even further. Fast forward eight years, when John is 55. He will have paid off his mortgage, dramatically reducing the amount of money that his wife would need to maintain the household. This might mean he can reduce the amount of coverage to $250,000, therefore reducing his premium.

Insuring Your Mortgage

When banks or other financial institutions lend you money for your mortgage, they usually offer you mortgage insurance. But that type of insurance may not be the best choice for many homeowners.

Typical mortgage insurance covers the amount of the mortgage, and the premium is based on a group rate of people within your age bracket. When you die, this insurance pays your lending institution, not you. If you pay off your mortgage, the policy is closed and you don’t get your premiums back.

Finally, mortgage insurance is underwritten after you die. This means that the insurance isn’t really confirmed or validated while you’re alive—there is no testing to ensure that you are in fact, insurable. After you die, however, your insurability comes into question. If the insurer finds something in your claim that makes you uninsurable, the policy can be deemed to be invalid, and your family receives nothing.

In contrast, many people opt for term life insurance to cover the cost of their mortgage. With this approach, the cost of the premium is based on your personal age and general health, which may mean lower premiums. Term insurance is also underwritten before you receive it. This means you don’t get the insurance if you’re not eligible for it, so there are no surprises for your family after you die.

In addition, term insurance provides a lump sum to your beneficiary upon your death. This means that your beneficiary can choose what to do with that money, opening up a range of options. For instance, your mortgage may be dramatically reduced by then, or you might have paid it off altogether. Your beneficiary is then free to use the insurance money to pay other bills, put aside for retirement or use in any other way they see fit.

Term Life Insurance Versus Mortgage Insurance

Life Insurance Mortgage Insurance
Life insurance can be purchased to ensure there is a lump sum of money available for your family after your death. The money can be used to pay off the mortgage. In addition, if the mortgage is already paid off or is nearly paid off, the family has the flexibility to use the money for other purposes. Mortgage insurance is usually offered by your bank when they lend you money (a mortgage). In this case, the beneficiary is the bank, not your family. The coverage protects the lender as it ensures that the mortgage itself is paid off.
Coverage Terms
Can be purchased in 10- or 20-year terms, or as permanent life insurance that covers you for the rest of your life. The policy is based on the amount of your mortgage. Once the mortgage is paid off, the policy is closed, and cannot be applied to anything else.
Flexibility
May be converted from 10- to 20-year or permanent insurance during the course of the policy.
The policy continues if you move your mortgage, sell your home or pay off your mortgage.
The policy is only applicable to the mortgage that it was originally assigned to, and cannot be transferred to other lenders or properties, or used for other purposes. At completion or cancellation of mortgage, it concludes, and all premiums are non-refundable.
Premiums
Premiums are based on your personal health and lifestyle, and require a medical examination. This can lead to lower premiums for those with healthier lifestyles, such as non-smokers. Premiums are based on a group plan, meaning you usually pay the same rate as everyone else in your age bracket. No medical examination is required at the time of application, but medical proof is required at the time of a claim. Should medical investigation prove that there was a pre-existing condition or misinformation on the application form, the claim can be rejected, even if premiums have been paid.

The Bottom Line

Term life insurance is a practical tool that can provide valuable protection for your financial plan. To see if it’s right for your situation, talk to an experienced certified financial planner.