Your Guide To Buying A Term Life Insurance Policy
Hi, my name is Tan. I am an independent CERTIFIED FINANCIAL PLANNER™ practitioner. If you are in the market for a term life insurance policy, this clip can assist you in making an informed decision when buying a term life insurance policy.
First, what is a term life insurance policy?
A term life insurance policy is designed for temporary coverage for a specific period of time. The premiums are fixed for the duration of the term, then the premiums skyrocket annually. That's why getting the right term and amount of coverage are critical.
For example, my friend is 30 years old and she just had a kid. She is making $150,000 a year and she wants the coverage to be 10x her income, which is $1.5 million. She got a 25 year term life insurance policy because 25 years from now, the kid would be 25 years old, finished college, and should be independent. The premiums are fixed annually for 25 years. After that, the premiums will skyrocket annually. If she passed away within the 25 year term, the insurance company will pay her beneficiaries $1.5 million and, in most cases, the $1.5 million could be income tax-free. Check out the IRS website and Cornell Law School for references (1) (2). I say income tax-free because she might be subject to estate taxes. You can check out here for the 2018 estate tax exclusion limits (3).
At the end of the term, she can cancel the policy or keep the policy and pay the annual renewal premiums. Normally, clients don’t keep the policy at the end of the term because the premiums are ridiculous. She also has the option to convert her term policy to a permanent policy anytime she wants before the date stated in the contract.
Now that we know what a term life insurance policy is, you may ask yourself, “why do I need a life insurance policy and can I accomplish my goals another way?”
Understanding your whys and knowing your options to manage risks can assist you in determining how much coverage you need and if you need temporary coverage, permanent coverage, or any coverage at all.
Once you have identified a need for a term life insurance policy, ask yourself, how long do I need the life insurance coverage for? And... How much coverage does my beneficiaries need if I am no longer here?
If you are not sure, a licensed professional can assist you in answering these questions. Once you answer those questions, it's time to go shopping.
You can purchase a term life insurance policy in a variety of ways: Directly from an insurance company, through an agent that only represents one company, or an agent that represents many companies like myself. You can do it online or in-person. The price of the term life insurance policy is the same if you go directly to the company or through an agent.
For your quote, you will need to be able to answer the following information: your gender, date of birth, height and weight, do you use any type of tobacco or nicotine, are you currently taking any medications, do you have any high-risk activities like jumping off airplanes, scuba diving, rock climbing, have any of your parents and/or siblings been diagnosed with and/or died from diabetes, cancer, and/or heart disease.
Providing this information will be enough to give you a quote. It is not your actual premiums. Once you have the information, reach out to a licensed professional and ask them these questions.
1. My goal is to…what do you recommend and why?
2. What are the death benefit breakpoints? Normally, it’s $100,000, $250,000, $500,000, $750,000, and $1,000,000. What is a breakpoint? For example, let’s say you buy a policy for $999,999 of coverage and it would cost $1,000 a year. If you buy the coverage for $1,000,000, it would cost $950 a year. The reason is because you reached the $1,000,000 breakpoint. It doesn’t mean you should start out with getting a $1,000,000 of coverage to get the breakpoint, it just means you should know your options to see if it make sense to increase the coverage to get the breakpoint.
3. Can you email me an illustration with the premium schedule?
4. What is the premium if I pay monthly, quarterly, semi-annually, and annually? Normally, paying annually is the cheapest option and paying monthly is the most expensive option because paying annually will mean less administrative costs and more benefit from time value of money. Time value of money is a dollar today is worth more than a dollar in the future.
5. Will the premiums change in the future? If so, when, and why?
6. Will the death benefit change in the future? If so, when, and why?
7. What benefits and riders are available on this policy you are recommending me?
8. How much does the benefits and riders cost and can you explain to me how it works?
9. Do I need to go through underwriting and what does it entail?
10. Does the policy build cash value? If so, how? Normally, a term policy does not build cash value, but I have seen some that does.
11. What is the surrender schedule? Normally, it does not matter because term policy does not have cash value, but if it does, it’s good to know the surrender schedule.
12. What is the Free Look Period? A Free Look Period is how many days do you have to get all of your premiums back if you changed your mind (4).
13. What are the clauses? For example, with a suicide clause, insurance companies may not pay out if you commit suicide for the first two years from the policy issued date (4).
14. What happens if I cannot pay premiums?
15. What are the qualifications to make a valid claim?
16. Can you walk me through the claim process?
17. What are the options of the payout?
18. Is it going to be in a lump sum?
19. Is the company going to deposit the money in a saving account? If so, what is the current interest rate the saving account is paying?
20. Does the policy have convertibility features? Generally, if the policy has the convertibility features. You can convert term life insurance to permanent life insurance without going through underwriting. The premiums should be higher because permanent insurance is more expensive than a term insurance. The longer you wait to convert the policy, the more expensive the premiums will be because the longer you wait, the older you are.
21. When do I have to convert it by? Normally, this is either before a certain age or 5 years from the policy issued date, whichever is greater.
22. What plans can I convert to if I want to do a conversion in the future? Normally, you can convert it to a permanent policy that is available at the time of conversion. It's an option you might not need, but it's good to have.
23. What are the financial ratings on the company? I like working with A-rated companies and it's super easy to check the companies financial ratings for yourself. Just go to their website and look for "financial ratings." The four major rating agencies are A.M. Best, Standard & Poor’s, Moody’s, and Fitch Ratings.
24. Can I access my policy online? Generally, you can go online to change your address, phone number, beneficiary designation, and pay premiums.
25. How is the customer service when I need help on my policy? If you want to know how the customer service is like, try calling customer service a couple of times to see how long it takes for you to talk to a live person.
The key takeaway is, you should write in your own language everything you know about the policy so you can refer back to it in the future.
Thank you for listening. Until next time. This is Tan, your trusted advisor.
References
(1) - https://www.irs.gov/pub/irs-drop/rr-07-13.pdf
(2) - https://www.law.cornell.edu/cfr/text/26/1.101-1
(3) - https://www.irs.gov/businesses/small-businesses-self-employed/whats-new-estate-and-gift-tax
(4) - http://www.insurance.ca.gov/01-consumers/105-type/95-guides/07-life/life-ins-guide.cfm
This material is for educational use only and does not constitute tax, legal, or investment advice. Information may be changed or updated without notice. Consult with a licensed professional regarding your personal circumstances.
Please do not excerpt or copy this information without prior consent from TAN Wealth Management.