How to Select a Term Life Insurance Policy

Term life insurance is a policy that provides coverage for a limited period of time. After the term expires, the policyholder has two choices: either drop the policy or continue coverage by renewing the term and paying annually increasing premiums. Since there are several different types of term life insurance policies offered, you should carefully consider the options before you choose. Term life insurance policies are available for a variety of terms; therefore, it’s important to take the time to look for a policy that suits your needs.

Difficulty: Moderate

Instructions

1. Compare prices. Obtain insurance quotes and information from various companies. Don’t be afraid to shop the market. Quotes can vary widely, as individual insurance companies use different formulas to determine the risk factors. Cost is based on how much risk is involved, which is why factors such as the age, overall health, lifestyle habits, occupation and marital status of the applicant are considered.

2. Research an insurance company’s financial ratings. Insurance ratings are similar to academic grades. These ratings are based on the financial stability of the company. The higher the rating, the better and the more likely that you will get paid if you ever file a claim. It will be well worth the time it takes you. A company should be rated by at least three of the five major rating services.

3. Contact an insurance company’s customer service department to request copies of its ratings reports. You might want to pass up a company if it fails to comply. You also can ask the agent for a copy of the rating service reports for any of the companies being recommended.

4. Consider the different terms available. An annual renewable term is the simplest and often least expensive form of term life insurance, but coverage expires after one year. More common is the guaranteed level term life insurance where the annual premium will be the same for a term of 10, 15, 20 or 30 years. However, the longer the term selected when you first take out the policy, the higher the annual premium will be. When calculating the premium, the insurer takes into account that as the insured grows older, a longer-term policy will be covering the more expensive years to insure.

5. Look at your life circumstances. Some financial advisers advise only wage earners to take out term life insurance, for instance. In the end, you should weigh life circumstances, cost of the policy, wage earnings, and health of the individual to be covered.

Tips & Warnings

• The longer an insurance policy remains in effect, the more likely it becomes that the company will have to pay a claim. Longer-term policies naturally are more expensive, but if you choose a 5- to 10-year term life insurance policy, the cost of the premiums will be cheaper, as the company is less likely to pay out a claim on that term.
• Remember that any quotes, which you receive for life insurance, will not be a guarantee of the price. Companies often provide quotes before any of the information they request has been verified.