Term insurance is insurance for a specific term (5 – 40 Years), for a fixed amount (the face value) and for a fixed premium. Rates are based on age, gender, health condition, family history and lifestyle. Term insurance is ideal for a young breadwinner to provide protection for the family in the event of premature death and the consequences that would have on the remaining family members. Term insurance is the most affordable form of life insurance. Rates are fixed for the full term and the insurance cannot be cancelled as long as premiums are paid on time.
Uses for Term Insurance
- Pay off a mortgage
- Provide for the costs of daily living: groceries, utilities, gas, car, clothing, etc.
- Provide funds for college for children or grandchildren
- Pay off debt and other obligations
- In business for key man insurance or buy/sell agreements.
How much term insurance do you need?
Add up all the costs of living and multiply by the years at risk. Consideration should also be given to anticipated future expenses, such as college for kids, inflation and other future expenses. The younger you are the lower the premiums will be for comparable coverage.
Most insurance companies say a reasonable amount for life insurance is six to ten times the amount of annual salary. Another way to calculate the amount of life insurance needed is to multiply your annual salary by the number of years left until retirement. For example, if a 40-year-old currently makes $20,000 a year, they will need $540,000 (27 years × $20,000) in life insurance.
Risk Classifications for Life Insurance
Before requesting quotes for Term or Final Expense insurance, you should objectively classify yourself for risk similar to that used by the insurance companies. You know your medical history and current ailments. You know the medical history for immediate family. This process is not to disqualify yourself, but rather to obtain realistic quotes.
In addition to age and sex, Insurance companies generally categorize prospective policy buyers into 4 general risk classifications, based on current and past health conditions, both personal and family. Within those classifications are smoker and non-smoker. These classifications help to determine the rates that you will be charged for the insurance policy they offer you. Depending on the size of the policy being requested, they may also require a medical exam, a check of your medical, hospitalization and prescription drug history and review of lifestyle or public records history. Each Insurance Company has their own names for each risk classification, but generally they fall into the following categories.
Excellent – Superior health, normal height/weight profile, no chronic illnesses, lab results within normal range, no immediate family members died from heart disease or cancer before age 60.
Good – Excellent health. Height/weight may be a little over the most preferred range, treatment for high blood pressure or high cholesterol usually acceptable, lab results normal or slightly abnormal
Average – Average health, normal life expectancy. Height/weight may be on the high side, possible treatment for several minor conditions, one or more parents died from heart disease/cancer before age 60, slightly elevated lab results (such as higher than normal blood pressure or cholesterol).
Poor – Below average life expectancy. Height/weight may be considered obese, treatment for chronic illnesses or major health conditions (such as prior heart attack, cancer, diabetes), abnormal lab results.
Where do you fit? Each insurance company does their own analysis and the risk classification may vary from company to company. We are familiar with each company’s underwriting requirements and can help you find the company that best fits your situation.
Guarantee Issue insurance may be a final option for those unable to obtain coverage within the above classifications. Guarantee Issue policies usually have a waiting period before full coverage is effective and face amounts will be limited.