Which Term Life Insurance Plan is Better?
We have been asked several times about term life insurance and which term life insurance plan plan is best or better. In many situations people equate best with price. In other words, since the 10 year term plan is cheaper per month than the 20 year term plan, then the 10 year term plan must be better. Unfortunately, that can be a very big mistake.
First, lets look at how term life insurance works.
Unlike cash value life insurance, term life insurance is very basic. The term policy has a death benefit and a premium payment. As an example, a policy may have a $100,000 death benefit payable upon the death of the insured and a premium payment of $10/month to cover the cost of the policy. That is pretty much it for term life insurance in general.
The difference between plans comes with the length of premium guarantee. As an example, with a 10 year term plan, the premium payment is guaranteed for 10 years. What that means is that, for the first ten years your premium payment will stay the same. The death benefit is usually guaranteed to stay the same for the life of the policy which usually is to age 95. Let say a man named Bob decides that he needs $500,000 in life insurance. Bob goes online and finds a 10 year term plan at $25/month. Bob decides that it is a good price and buys the policy. For the first ten years, Bob will be guaranteed to pay $25/month. He looks at his approved policy and notices that, although his coverage ($500,000) stays the same up to age 95, after 10 years, his monthly premium triples. Bob may or may not be happy with his new insurance policy.
How to select a term life plan?
When applying for term life insurance, you may be given several plan choices. Some of the most popular include the 10 year term, the 15 year term and the 20 year term plans. Also available are the 25 year term, 30 year term and the 40 year term (usually for mortgage life insurance).
To put it simply, the best way to decide on which term life insurance plan is better is to look at your need and your budget.
The amount that you need - That can be calculated with your broker or financial advisor or, as some people do, use the simple formula of 10 to 15 times present income. The simple formula is just to get you started and have something in place while you take the time to do a more thorough analysis of your needs. In other words, if you make $50,000/year, then it is usually recommended that you carry between $500,000 and $750,000 in life insurance.
The length of time that you need the insurance - That is also an important factor. If you are looking to cover a mortgage loan and the loan if for 30 years, then a 30 year term plan may be best. If you have kids at home and the youngest is three years old, then you may want to make sure that a part of your life insurance coverage will last at least until your youngest kids is out of the house. Again, speaking to an advisor about this is important. You can always gather more info online, which is good, but speaking to someone will most definitely give you a more thorough answer that is specific to your needs. The advisor will listen for cues in your words that you may not consider important and yet could be crucial.
Your Budget - As far as your budget is concerned, that is something that, unfortunately, although basic, many people miss. Yes, it is important to get the amount of coverage that you need and the length of coverage that you need. But if you get a plan that is not affordable then you may need to cancel it and end up with no coverage at all. When looking at your budget and deciding which term plan is best, you must first consider the amount of coverage that you need then the length of time. As an example. Bob find out that he needs $400,000 in life insurance for 20 years. After looking at the rates he notices that he can only afford a $200,000, 20 year term plan or a $400,000 10 year term. Which should he choose. Without question, he should select the $400,000 10 year term. Why? Simply because if a few weeks after he gets the coverage, he gets into a head on collision and dies, his family will not care for the $200,000 20 year term plan but will rather have the much needed $400,000. Of course, as soon as he can, Bob should upgrade to the 20 year term plan.
Term Life Insurance Riders to consider
As with most life insurance plans, term life insurance offers certain riders which should be noted. The most popular is the return of premium rider. Simply, this rider returns all of your premiums at the end of the plan's term (15, 20 or 30). The next three most popular are the waiver of premium, which waives your insurance premium payments in case of disability (see definition in your policy). The accident rider pays in addition to the basic death benefit in case you die in an accident. The disability rider pays you a monthly payment in case you become disabled (see your policy for details). There may be many other riders and variations available and it is important you ask about riders.
We hope that the above information has given you a better understanding of selecting the proper term life insurance plan. Always review your approved life insurance policy and if you are not 100% satisfied, contact the insurance company or your broker. Most policies have a 30 day, no obligation review period. Also, your needs will change over time, make sure to do at least a yearly review. Please always feel free to ask questions. Be well.
