Buying term life insurance has become easier than ever with the advent of websites that aggregate quotes from multiple carriers to allow consumers to easily compare life insurance
premiums. But to make a decision like a pro, you still need to understand how to accurately determine the face value (death benefit) and term length that you need. You also should be aware of variations in term life policies.
Making wise decisions about how much face value and term length to buy will allow you to protect your family without spending more than you need to. If you compare life insurance
premiums for policies with more face value or term length than you need, you stand a good chance of paying more for a policy than necessary, while if you’re looking at policies with not enough of either, you could end up putting your family’s security at risk.
Fortunately for consumers, top quote-aggregation sites also feature various calculators to help you figure out the appropriate face value and term length.
Factors to consider when determining the amount of coverage you need as well as the term length of coverage include: Age
. Since the primary purpose of term life insurance is to prevent financial hardship for your loved ones should you pass away, your age—as well as the age of your family—plays a crucial role in deciding how long the term should be. The term should be at least as long as you expect your children to be wholly or partially dependent on you. And if you are young enough that you will still be working when your children become independent, you may want to extend the term until your retirement age to provide security for your spouse. Debt
. Your coverage should cover all outstanding debts to prevent them from falling onto your loved ones should you pass away. Anticipated Income
. Your anticipated income also impacts the estimation of how much will be lost financially if you were to pass away. It seems somewhat counterintuitive that as you grow older and gain more assets, you gain less from life insurance than when you were young and had relatively little wealth. But that’s exactly what life insurance does—it insures against the loss of what you don’t yet have but most likely will attain. Therefore, you’ll need to determine how many more years you expect to work and how much you expect to make each of those years. Assets That Need Protecting
. Determining how much insurance you need involves all aspects of your family’s financial situation. For example, if you still have a mortgage on your home, term life can enable your family to keep the home by providing the funds to pay off a mortgage, as well as to pay the necessary estate and property taxes. Likewise, if you own a business, you’ll need enough face value to allow your heirs to continue operating the business. Spouse’s Earning Power
. Replacing your lost income is important whether your spouse works or not. However, the amount you need to replace may not be as much if your spouse can be self-supportive, and you also may decide the term length doesn’t need to extend beyond your children’s independence. Cost-of-Living Increases
. As you measure your expected income against future needs, you’ll of course have to account for inflation. Large anticipated expenses
. When looking at the income you’ll need to replace, you may want to consider expenses beyond basic living expenses. For example, you may consider the cost to put your children through college, caring for an elderly parent, or continued support of a special-needs child.
To sufficiently compare life insurance
premiums, you’ll also need to research and be aware of available riders—such as conversion riders, which allow you do switch to a permanent policy at the same health rating (adjusted for age) that you received for your term policy. This rider can save you a substantial amount of money if your health worsens during the term.
You also should pay attention to the financial strength of each carrier you consider. Look for an A- rating or better from a service such as A.M. Best.
Fortunately, leading quote-aggregation sites also include educational resources to help you best compare life insurance