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Term life insurance can provide simple, affordable financial security. A life insurance policy ensures that if you unexpectedly pass away, your dependents will receive a tax-free, single payment of money (the payout or death benefit).
A life insurance payout can be used for pretty much anything, but people often use them to pay off a home mortgage, living expenses, or a child’s college tuition.
With term life insurance you choose how many years your policy will last (the term length) and the coverage amount that will be paid out if you die. You pay a monthly or annual price for your policy (the premium).
The main differentiating factor of whole life insurance is that it lasts for your entire life and can be used as an investment vehicle—unlike term policies, which expire after your chosen length and have no investment component. For these reasons, whole life insurance policies typically cost 10–20x more than term policies for the same amount of coverage.
Some insurers invest your whole life premium payments and the interest earned on those investments goes back into your policy as accrued cash value. However, in many cases, the interest earned does not offset the 10-20x cost of the policy premiums.
Whole life insurance is a good option for anyone with complex financial situations or estate planning needs, but term life is a better option for most people because it’s much simpler and it costs much less.
- The coverage amount and term length you choose (less coverage and shorter term lengths have lower rates)
- Your age (younger people typically have lower rates)
- Your health status (healthier people typically have lower rates)
- If you smoke (non-smokers typically have lower rates
Over half of Americans overestimate the cost of term life insurance by 3x or more? (LIMRA 2019). So, if you’re reading this and thinking I probably can’t afford a policy, think again!
At Ethos, we recommend that you spend no more than 1% of your salary on a term life insurance policy. So if you make $50K/year, your policy should cost no more than $52/month or $500/year.
Underwriting is the process of assessing how “risky” you are to insure, and based on that, how much it costs to insure you. There are a variety of factors they consider, including:
- Age
- Tobacco use
- Family medical history
- Current health
- Gender
- Driving record
- Criminal record
- Credit score
- Foreign travel
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If you do not pass away during your term, you have a few options when your term ends:
- You can apply to extend your term to ensure you always have coverage.
- You can apply for a new policy with a longer or shorter term, with the same, or more or less coverage.
- You can elect to not get another policy if you determine you no longer need the financial protection.
Is there a chance the payout won’t be paid?
A claim may not be paid out if underwriting finds that parts of the application were answered untruthfully or if the claim is the result of death by suicide within the first two years of the policy being in force.