The 4 C’s of term life

Key considerations to review when purchasing insurance


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Insurance doesn’t have to be complicated. Term life insurance currently represents 36 percent of total life insurance sold in the U.S. each year. It comes highly recommended by financial gurus like Suze Orman and Dave Ramsey because, for most people, term is the most affordable life insurance available.

Term life insurance exists for a defined period of time (usually 10, 20 or 30 years). When you buy term life, your beneficiary will get paid the life insurance amount if you die during that term. Like renting an apartment, term life insurance gives you benefits for a limited period of time without building any cash value or equity.

When shopping for term life insurance, it is important to consider the 4 C’s.

Coverage

How much life insurance coverage you need varies depending on the individual. Life insurance is used to replace the income for a lost spouse, to pay off mortgage or credit card debts, and to plan for future expenses (like college tuition).

Don’t overthink it. A satisfactory amount of coverage will generally equal five to seven times your annual earnings.  If you want to be scientifically exact, Life Happens has a good application to help you calculate your target (http://www.lifehappens.org/insurance-overview/life-insurance/calculate-your-needs/).

How long do you need your insurance? Most people want to make sure that their life insurance will last long enough to provide for big-ticket items like home mortgages or their child’s college educations. Budget also plays a role: the longer the term, the more expensive the premiums.

Most term insurance policies offer a variety of riders. Riders are added features that can include coverage for children, spouses and even offer paid premiums should you become disabled. Any good insurance agent will help you sort through and select this type of additional coverage based on your needs.

Cost

 Most term life insurance requires an application and underwriting. This is how a life insurance company determines if they want to offer you coverage and how much they will charge. There are several approval levels, and rates will vary depending upon age, height, weight, health, and smoking status.

Life insurance costs will vary based on the amount of insurance purchased and for how long. There are four common rating levels: Preferred Best, Preferred, Select, and Standard. 

The most popular term life policy is the 20-year level term.

Conversion

Some may want or need to keep their life insurance after their allotted term ends. Buying a term life insurance policy with a conversion option is really important. Conversion is a feature that allows you to keep life insurance by converting (aka changing) to a permanent policy. 

Who would want to convert to a permanent or “whole life” policy? A great example is someone who bought a 20-year policy at age 30 during the peak of their health, but at 49 becomes no longer insurable due to health reasons. The conversion feature would allow that person to keep all or a portion of their life insurance after the 20-year term for the rest of their life.

Ohio National Life Insurance Company offers a basic term policy, or a term plus that gives expanded options for converting to a whole or permanent policy.

Carrier/company

Not all insurance companies are created equal.  Understanding the significant or even nuanced differences between insurance carriers is key to selecting the right policy. There are many ways that insurance companies may differ.

First, when buying any kind of insurance, you must consider the financial strength of the insurer. AM Best rates insurers financial strength and you’ll want to buy from a company with an “A” or better rating.

Second, the application and approval process is not the same with each insurer. Buying term life insurance usually requires a general application, an in-depth medical questionnaire, and in most cases a brief medical exam. Some insurers treat smokers more favorably, while others will offer more desirable rates for non-smokers.

Consider the portfolio of life insurance products that the company offers. If converting the coverage beyond the term is attractive to you, make sure the insurance company you buy from has several attractive permanent life insurance options available. 

Stephen Donohue is owner of Atlantic Insurance & Benefit Company, Nashua. 

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