Term Life Insurance FAQ
The Discover Insurance Center doesn’t just offer insurance, it offers insurance education too. Get the answers to some of the most commonly asked insurance questions, so you can be empowered with information.
- Why should I buy life insurance?
- If your income pays for your spouse’s and children’s food, clothing, shelter and education, your death would mean that your family is no longer financially supported. Life insurance replaces your income, protecting your loved ones who depend on you for material support.
In addition to replacing income, life insurance can be used to create an inheritance for your heirs. It can also ensure that certain bills will be paid after you’re gone, such as taxes, funeral costs, mortgage costs or other loan obligations. Finally, the insurance proceeds can be donated to charity as a tax-deductible contribution. - How much life insurance do I need?
- Most experts say you need anywhere from 5 to 10 times your annual income to replace the cash you bring into the family. For example, if you earn $50,000 per year, you’ll want to buy a life insurance policy with a death benefit of $250,000 to $500,000.
But it’s possible you’ll need more than that. If you stick $500,000 into an investment earning 5 percent, it will generate only $25,000 per year. After taxes, there may be less than $20,000 left, far less than what would remain after taxes on a $50,000 salary. Unless you have other money coming in, from a pension, 401(k) proceeds, or Social Security benefits, you may wish to buy a larger life insurance policy. - My spouse is a stay-at-home parent. Should we buy a life insurance policy?
- If one spouse or partner is a stay-at-home parent and that individual dies, you’ll have to replace him or her with a paid employee. A full-time babysitter, for example, can cost $25,000 to $30,000, or more. If you decide to put your children into full-time day care, you’ll pay at least $15,000 per child.
Replacing all the things your stay-at-home spouse does with outside services may cost you additional dollars as well, so you should consider buying a life insurance policy that is at least 5 to 10 times the annual value of the services he or she provides. - What are the basic types of life insurance?
- There are two basic types of life insurance: term and whole life.
Term life insurance is the more basic and popular of the two, but it covers you only for the length of the policy, which can range from 1 to 30 years. With a term life policy, if the person named in the policy dies during the term, the policy pays off.
There are two kinds of term life insurance: level term and decreasing term. With level, the death benefit remains the same throughout the term of the policy. With decreasing, the death benefit decreases, typically every year, for the duration of the term. Almost all term life policyholders purchase level term.
Whole life insurance is coverage that is in force until you die. You might buy a policy when you’re 40 years old that won’t pay off until 50 years later.
A chief distinction between whole life and term life insurance is that whole life consists of two components: the death benefit and a “cash value,” or savings, portion. Because a portion of each premium contributes to the cash value of the policy, premiums are significantly higher for whole life insurance than term life insurance.
In addition to costing more, whole life policies tend to give you a smaller death benefit than term life. If you cancel a whole life policy, you will receive the cash-value portion (also known as the cash-surrender value) of the premiums you’ve paid.
Whole life insurance comes in a variety of forms, including universal life coverage and variable life and variable universal life coverage. The difference in these policies is how the savings component is invested. - What is level term insurance?
- A level term insurance policy is one in which the premiums stay constant over the term of the policy. So, if you buy a 20-year level term policy, you’ll pay the same annual premium for 20 years.
- What type of life insurance should I buy?
- If you need insurance only for a fixed period of time—say, until your children are grown or have graduated college—then a term life policy will suit your needs. Term is also a good choice if you’re trying to buy the most life insurance for your dollar.
However, if your insurance needs will never end—if, for example, you have a disabled child who will always need financial support—then a whole life policy might be useful.
Some financial advisers suggest you buy both kinds of policies and use them for estate planning and to grow cash on a tax-deferred basis. - How do I pick a life insurance company?
- Check with your state’s department of insurance to make sure an insurance company is licensed in your state. You never want to buy insurance from a company that isn’t licensed and doesn’t have a good track record with consumers, so check with the state to see if the company has had any complaints filed against it.
You’ll also want to check the financial strength of any prospective insurance company. If it’s not financially healthy, it may not be around when you need the policy to pay off. - How can I assess the financial strength of an insurance company?
- There are five independent agencies—A. M. Best, Fitch, Moody’s, Standard & Poor’s, and Weiss—that rate the financial strength of insurance companies. Each has its own standards and rating scale, using a system of letter grades with pluses and minuses, so a grade at one agency may mean something different at another agency.
Examine the rating scales at each of these companies in order to make a fair comparison. Check how an insurer is ranked by at least two agencies. All of this information is available on the agencies’ websites and is free, although you may have to register. You can also find this information at your local library. - How can I save money on life insurance?
- If you belong to a credit union, professional organization or labor union, check to see if it offers life insurance programs or a discount on premiums. Some employers subsidize group life insurance programs at deep discounts and allow you to pay your share of the premiums through a payroll deduction.
Automating your payment (either by putting the premium on a credit card or through an auto-debit from your checking account) may net you another discount. - What is a beneficiary?
- A beneficiary is the recipient of life insurance proceeds. It can be one or more individuals, a trust you’ve set up, a charity or your estate. Your policy should specify both “primary” and contingent, or alternate, beneficiaries: if your primary beneficiary is deceased or can’t be located, proceeds will go to the alternate beneficiary.
To make locating a beneficiary easier, include the person’s whole name, address and social security number on your form. A clear designation will reduce the likelihood of squabbling among beneficiaries. Just in case, you should provide for how the proceeds should be distributed in the event that one or more beneficiaries can’t be found.
Remember: life changes. Be sure to update the primary and contingent beneficiaries on your life insurance policy in case of marriage, death, divorce or the births of children. - Should I buy life insurance on my child’s life?
- Since the main purpose of buying life insurance is to replace income that would be lost in the event of a death, there’s generally no need to insure the life of a child. (What about child stars who earn big bucks? Their earnings are protected by law and may not be used to support the family.)
You may want to have a burial insurance policy if funeral expenses would present a hardship to you in the event of your child’s death. - Do empty nesters need life insurance?
- While most financial experts think you don’t need coverage once the kids have flown the coop, there are reasons you still may want or need a life insurance policy.
If you contribute to your children’s, grandchildren’s or parents’ financial support, you may want to continue to pay for a term life insurance policy.
Life insurance proceeds can also fill the gap for “lost” retirement savings if you die prematurely or before Social Security kicks in, enabling your survivors to continue making payments on major debts like a mortgage, a home equity loan or a car loan. Life insurance proceeds can also help pay for medical expenses if medical coverage is lost before Medicare kicks in.
To calculate how much life insurance you need, add up how much income you bring in and how much your spouse would have in retirement if you died. If your assets, pension and savings won’t be enough, you may want to buy a term life insurance policy.
