What is term life insurance? How does term life compare to whole life? Do you need life insurance? If so, how much insurance do you need? And what will it cost? Want to know how to get term life insurance quotes without personal information? Let’s explore the topic further…
Who needs life insurance? (Probably you)
If anyone at all depends on you and/or your income, you probably need life insurance.
Life insurance is commonly used for two main financial situations:
- Paying off family debts
- Providing income replacement
We all hope to live well into “old age” but in reality this is not always the case. An illness or accident can trigger an unfortunate turn of events.
I can’t emphasize this enough:
I understand. This is a tough topic. None of us like to think about death. The reality though is that all of us will pass away at some point. Many of us when we’re around 80*, but for some of us it will be sooner and unexpected.
[* Did you know that the average American lifespan was estimated at 78.8 years in a 2016 analysis? I didn’t! I thought it was a lot older than that.]
You really need to consider if you need insurance, and then you need to take action to get it set up. Do it for your family.
What factors impact life insurance rates?
There are a number of factors that impact the rate quoted for life insurance.
The first one is the type of insurance. Are you quoting whole life or term insurance? (More on the differences between these two options in the next section.)
Besides the type of insurance, there is a lot of personal information that comes into play. The most common information needed – at a minimum – includes:
- Where you live
- Yes, your insurance rates will vary depending on where you live. That might not sound “fair” but it is what it is. Insurance companies spend a lot of money researching factors that impact someone’s lifespan and they apparently feel residence is enough of a factor to impact rates.
- Your age
- The younger you are, the less likely you are to pass away anytime soon. With all other factors the same, the rates for someone who is 20 can be VERY different from someone who is 30, 40, or 50. Rates jump quite a lot for older people.
- Your gender
- Women have an average life expectancy rate about five years older than men. This of course impacts the likelihood that the insurance company might pay, so it impacts the rates.
- Your physical characteristics
- For sure the insurance company wants to know how tall you are and your weight. Overweight or otherwise unhealthy people will get charged higher rates. This is another area where staying fit can have a big positive impact on your financial situation.
- Your medical history
- The insurance company will ask you questions about your medical history. They may also ask you to sign something giving them permission to contact doctors and look at medical records. If you have a history of a medical condition that can impact your expected lifespan, they want to know.
- Do you smoke
- This is a big one too. Smokers have an average life expectancy that is 10 years lower than non-smokers. Do you smoke? Stop now. If you haven’t smoked for at least five years, the insurance company might not penalize your rate.
The big question: Term insurance or Whole Life?
Life insurance comes in two different forms – term or whole life. Whole life is also sometimes referred to as permanent life insurance. If you see either of those names, it’s the same type of insurance product.
Both term and whole life have a defined benefit amount that is paid out upon death of the insured of person. The benefits are paid out to the person who is designated as the beneficiary. Speaking of which, if you have insurance already, it’s a good idea to make sure the beneficiary information is current and accurate.
Beyond the fact that both types of insurance have a death benefit, there are a number of major differences between them.
Term life insurance (best for 95% of people)
Term life insurance is purchased for a specific length of time. Common lengths are 10, 15, 20, and 30 year term insurance.
When the insurance is quoted, a rate is provided for a desired specific term. A $500k policy for a 10-year term is going to cost a lot less than the same amount for a 20-year term. The reason shorter term policies cost less is the short length of time lowers the insurance companies odds that they’ll wind up paying on the policy.
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When the term of the policy expires, there is no more insurance coverage. If there is still a need for life insurance at that point, a new policy will need to be quoted and made active.
Financial speaker Dave Ramsey always recommends 20-year term insurance. He suggests that during that 20-year term the insured should work to clear out 100% of their debt, build an emergency fund, start saving for college, and work on investing for the future. If those steps can all be completed before the term expires, the need for life insurance at that point is much lower – or there might not be a need at all.
Whole life insurance (for that other 5%)
On the other hand, whole life insurance lasts for your entire life. There is no term limit. You continue to pay every month until you die (or until you cancel the policy).
Whole life insurance is much more expensive though for the same level of benefits.
As I mentioned on term insurance – the longer the coverage, the higher the cost. So for insurance that might cover you for 10 year, or it might cover you for 60 years, the rate is going to be substantially higher.
Just HOW much more is whole life?
My friend Tim Maurer (author and Certified Financial Planner) got life insurance a few years ago. He wound up with term insurance but quoted whole life out of curiosity. As mentioned in a Forbes article he wrote, the cost for whole life started at ten times the cost of term, and in some cases was as much as twenty times as expensive.
Another major difference between the two
Another major difference, besides the cost, is that whole life insurance include a savings component.
Some people like this because it is a forced savings plan. The whole life policy will actually accrue a cash value over time. Understand though: Often in the first few years (at least four on average) cash doesn’t accrue. The money paid those first few years provides no benefit beyond what term would provide.
Once you do have cash value though, you can borrow against the insurance. You wind up paying interest to borrow your own money, so this doesn’t seem ideal, but it happens.
But there’s a catch:
The fees associated with the insurance company’s management of the cash value – whether literally held in cash or invested for you – are high. Whole life insurance policies almost never provide a better return than someone could get investing on their own.
If you want insurance for your entire life, consider this…
According to a study by a group named LIMRA, quoted in a Consumer Reports article a few years ago, about 4% of whole life policies lapse every year. That means people cancel them – officially or just stop making payments. Four percent per year. If 4% of clients drop it each year, that’s 100% of a group after 25 years. This means VERY few people hold on to whole life insurance for more than 25 years. If that’s the case, why not buy 20 or 30 year term insurance at one tenth of the cost?
How can you actually use this? Insurance for the wealthy
Specifics are beyond the scope of this post but there are some estate-planning situations where whole life insurance is worth considering. There are tax implications for extremely wealthy people. I’m not talking about a family with a million dollar net worth – I’m talking about multiple millions. These tax advantages really only make sense for perhaps the top 5% of households in the United States.
Want to get an idea of the cost of term?
There are places to get term life insurance quotes online without personal information. Note that no quote for insurance is official until the insurance company has your personal information – often including someone checking your weight, blood pressure, medical history, and some background.
But you can get a pretty good idea what it will cost online. Here are two sites I found that allow you to get term life insurance quotes without personal information. (We have no affiliation with them and have no incentive for you to use their sites.)
How much insurance do you need?
Clearing family debt
As mentioned above, one use for insurance is to make sure that family debts are paid so surviving family members don’t have to worry about them.
Student loans. Mortgages. Car loans. The average American family has quite a few debt obligations. It takes a lot of money – thousands of dollars each month – to cover those payments. Having enough insurance so that your family can clear those debts if one of the family providers passes away… that would be a huge blessing to the rest of the family.
Covering future financial obligations
Do you have children that will be attending college at some point in the future? How about weddings costs for your kids? Maybe you’d even like to cover college costs for your grandkids.
There are all big financial goals that people often consider when calculating the total amount of life insurance they want.
A very common reason to have life insurance is to provide income replacement if your family currently depends on you for living.
How much? Well, using the 4% rule that I’ve written about before, you might want to consider 25x your current income.
So what’s the total insurance need?
Let’s just throw around some numbers. Let’s say you have $250k of debt with a mortgage included in that total; and you want another $250k to cover college for your children; and that you want to replace $40k per year of income – that’s another $1.25 million ($40k x 25).
In this example we’re looking at $1.75 million of life insurance.
Here’s the good news… A term life insurance cost example
At one of the links above I put in information to get an estimate for a 30-year old male, 5’10, 155 lbs, non-smoking, living in South Carolina. (No, that’s not me – I’m well beyond 30.) Based on that information, a 20-year term policy for $1.75 million dollars would cost $688.32 per year. That’s only about $57/month or $13.25/week. That’s a very reasonable amount of money to pay for assurance that your family will be taken care of if you pass away prematurely.
The bottom line is you almost certainly need insurance. If anyone at all depends on you, this is a topic worth considering. Perhaps it feel uncomfortable to think about and discuss, but it is very important.
Do it for your loved ones.
[If you want to read some more on this topic, you might want to check out this post from Cameron at Save Splurge Deny Debt. He’s an ex-insurance salesman so has an interesting perspective from “the other side”.]
If you don’t already have insurance, you might want to check rates from the two places above where I mentioned you could get term life insurance quotes online without personal information.