Determining how much term life insurance you need
Before you buy term life insurance, calculate how much life insurance you need. Consider why you’re buying the coverage—are you buying life insurance so your family can continue to pay the bills and reach financial goals if you die and your income stops? In that case, start by looking at your family’s expenses, assets, income sources and financial goals.
Also consider how long you’ll need insurance. That is an important factor for determining whether it is best to get term vs. whole life insurance, or another type of permanent policy.
If term life insurance is the best choice, consider the following:
- Outstanding debts. Think about the major debts that you want your beneficiaries to be able to pay, such as your mortgage, car loans and credit cards.
- Replacing your income for dependents. A life insurance payout can replace the income that will stop if you die. These needs are particularly large when you have young children and not a lot of savings. Consider your family’s everyday expenses and how many years’ worth of income you’d like to replace, accounting for inflation and anticipated income increases through time.
- Future needs like college or final expenses. Are there major expenses in the future that you’d also like life insurance to cover? For example, would you like your family to have money to pay for college in full or a portion of the costs? Do you want to provide enough money for private school tuition?
- Burial expenses. Funerals can cost several thousand dollars, and a life insurance policy can help your beneficiaries cover those expenses.
After you add up these expenses, subtract money your family can rely on from other sources, such as savings or other life insurance policies. However, keep in mind that coverage through an employer often ends if you leave the company.
There are free life insurance calculators online to help pinpoint coverage amounts, or work with a financial adviser who can help you figure out how to incorporate life insurance into your financial plans.
What to look for when buying term life insurance
Premiums are just one factor to consider when choosing a term insurance policy. It’s also important to compare other details, such as:
- Renewability. What options will you have if the level term period ends? Most term policies are renewable, but premiums can increase significantly.
- Term life conversion. Can you convert the term insurance policy into permanent life insurance—such as whole life or universal life insurance—before the term is over? How long do you have to convert and what are your policy choices? Some insurers let you convert into any permanent policy the company offers, while others limit your conversion rights to just one or two of their policies.
- No-exam underwriting. A growing number of life insurance companies are offering policies without a medical exam. Your health will generally still affect your premiums, but insurers use other data sources to gather information about your medical condition and health history.
- Life insurance riders. Does the policy offer additional coverage that is valuable to you? For example, does it offer an accelerated death benefit that lets you access a portion of your death benefit early if you’re diagnosed with a terminal, critical or chronic illness? Would you like a waiver of premium rider, which lets you stop paying premiums if you become totally disabled?
How to get term life insurance
Once you’ve chosen a term life policy, the buying process is relatively simple.
- Find out how to buy the policy. Can you buy it through an agent or directly from the insurer? Some companies work with independent agents, some only with their own agents, and some sell online.
- Fill out an insurance application. You usually need to answer questions about your health, your family’s health history and other risk factors.
- Take a medical exam if required, although more insurers are offering policies without requiring a life insurance medical exam.
- Get the quote. After the insurer completes the underwriting process, you’ll find out the rate class you qualify for and how much you’ll have to pay in premiums.
- Buy the policy and pay your first premium. Determine whether you will pay future premiums monthly, quarterly or annually and if you’ll have the payments deducted automatically from your bank account or credit card, or if they’ll send you a bill.
