Last updated: October 2023
Life insurance policies offer financial protection for your loved ones in the event of your death, helping them handle your funeral expenses, pay bills, and live comfortably during a difficult adjustment period. But what are the different types of coverage available, and do you really need to consider them? If you’ve ever wondered what is term life insurance or how does term life differ from whole life coverage, consider this your guide. We’ll teach you the basics of term life insurance, how to calculate your life insurance needs, and how to apply for coverage.
What is term life insurance?
Here’s a quick breakdown of term life coverage and how it differs from permanent life (the most common being whole life) insurance.
What does term life insurance mean?
Term life insurance is a policy that lasts for a set period of time or “term,” like 6 months, 12 months, or longer. It guarantees a predetermined level of coverage for this period as long as you comply with the policy provisions and the premium payments are made. Should the unthinkable happen within the term, the term life insurance policy would pay beneficiaries that set amount of money, which they could use to help with your final expenses and/or for their current and future needs. This coverage can help bring peace of mind to families who may be going through a tough transition.
What is permanent life insurance?
Permanent life insurance (sometimes referred to as cash value life insurance or whole life) is a policy that lasts for the lifetime of the policyholder as long as the policyholder pays the applicable premium. A permanent policy also accumulates cash value and typically the policy may be “cashed out” or borrowed against if the policyholder needs access to the money. In general, the longer you own a permanent policy, the greater your total return will be. Like term life insurance, beneficiaries receive death benefits to help pay for the expenses that may come with the loss of an income.
How does term life insurance differ from whole life insurance?
While both term life insurance and permanent life insurance provide beneficiaries with monetary compensation, there are two general differences between the two types of life insurance:
- Term life insurance lasts for a pre-defined period of time.
- Permanent life insurance exists for the life of the policyholder as long as the policy is kept current.
- Term life insurance premiums are typically lower, but the face value of the policy is fixed and does not accumulate any cash value over the term.
- Permanent life insurance premiums are typically higher, but the policy will earn cash over the lifetime of the policy.
Term Life Insurance Benefits
What could a term life insurance policy pay for? There are certain expenses your loved ones might be responsible for upon your death. Here’s a list of how your beneficiaries could use a term life insurance payout.
1. Burial Expenses
Did you know the average funeral costs $7,848? That's a pricey unforeseen expense, but a term life insurance policy of $15,000 could pay your funeral expenses and provide a small financial cushion for your beneficiary.
2. Outstanding Debts
There are no hard and fast rules for how debt is handled after death. However, depending on how your financial accounts are set up, the state you reside in, and the type of debt in question, certain family members could be responsible for paying off your debt.
Term life insurance can help pay off two types of debt, in particular:
- Credit Card Debt: If you leave behind thousands of dollars in credit card debt, your family may not have to pay it back – unless one of them is a co-signer or "joint cardholder." A parent may co-sign with a child who's establishing their credit, or an adult child may co-sign with their elderly parent to help manage expenses. Credit card co-signers can inherit credit card debt, which a term life policy could help pay off.
- Auto Loan Debt: If you pass away while you're still making car payments, the vehicle could be repossessed. If there is a co-signer on the vehicle loan, the co-signer would be expected to continue to make payments. A term life insurance policy could help settle outstanding auto loan debt.
3. Everyday Living Expenses
Think about your family's monthly expenses or take a look at last month's bank statement. You've got to pay for gas, groceries, rent, utilities, cell phone, cable, and tuition bills – the list goes on.
In 46% of two-parent households, both parents work full-time. Without your income, could your family continue to pay these bills and make these kinds of purchases? During a time of emotional stress, term life insurance could help ease financial burdens so your family can pay for essentials worry-free.
4. Care for a Parent or Sibling
Do you need life insurance if you're single with no spouse and no kids? You may be under the impression that single people don't need life insurance, but that's not the case.
For example, are you responsible for taking care of your parents, grandparents, or siblings? According to an AARP survey, 21% of caregivers are never-married singles. What would happen to your dependents if you weren't around to care for them anymore?
A life insurance policy can help make sure that your dependents are cared for in the event of your death, or at least until another family member can make arrangements to care for them.
Who gets the benefits of my life insurance policy?
As the policyholder, you get to designate the beneficiary or beneficiaries for your policy. When you die, your beneficiaries would receive the benefits listed on your policy, as long as the term of your policy has not run out. Please note, designating a minor child as your beneficiary is not a good idea because a life insurance company is not legally permitted to pay the proceeds to a minor. If you want your minor children to benefit from your life insurance, be sure to make the necessary estate plans in advance, such as: naming a guardian, naming a custodian under your state’s Uniform Transfers to Minors Act, or establishing a child’s trust.
Clarifying Term Life Insurance Coverage
How much term life insurance coverage can you get? Depending on the state you live in, and the company you choose, you’re almost certain to have several options. For example, Direct Auto Insurance offers individual one-year term life insurance levels of:
We guarantee that we will renew your policy for two additional one-year terms at the same rate, regardless of changes to your health or age, provided you pay the renewal premium.
How much does term life insurance cost?
The price you’ll pay for term life insurance depends on a number of different factors. Among them are your age, your health, how much coverage you need, and the length of your policy.
If you are young and in excellent health, you can expect to pay less money than someone much older. If you are single or living without kids, you might not need as much coverage as someone with multiple kids, meaning your premium is lower. The price of your policy might also be affected by whether you pay upfront or in installments.
This is the beauty of term life insurance – you can find something that fits your budget and needs. With a term life insurance policy produced by Direct Auto, you can get coverage for less than $1 a day1, roughly the same price as a soda.
Is term life insurance worth it?
Term life insurance can temporarily help support your family and loved ones should you die. If you have people who depend on your income, term life coverage could be a wise investment. And, as mentioned above, with some coverage options starting at less than a dollar per day, this valuable peace of mind is relatively affordable.
How to Calculate Your Term Life Insurance Needs
You're interested in getting a life insurance quote, but what should you do when you have to select the policy amount? Do you go for the highest amount or the lowest? Follow these steps to learn how much term life insurance you need:
1. Add up your family’s "can't-live-without" expenses.
There are probably people in your life who depend on you financially, especially if you're the primary earner in your household. Without your income, your loved ones could struggle to pay for necessities like rent, food, and utilities.
Check out last month's bank statements, your budget, or your checkbook to see everything you bought and how much you spent. Jot down the bare necessities: the things your loved ones couldn't live without, like rent, mortgage, gas, electricity, water, food, childcare, etc.
What to do: Add up your total monthly expenses and multiply it by the number of months you think it would take your loved ones to get back on their feet.
2. Consider your funeral service.
Thinking about your own funeral service may feel a little morbid, but it's so important to consider what kinds of services you want if you want to take care of your loved ones. Having your funeral arrangements made ahead of time can give your loved one's one less thing to worry about during an emotional time.
What to do: Call around to funeral homes in your area to get estimates. Write down your funeral wishes and share them with your loved ones.
3. Add up your debt.
Do you have a car loan, student loans, or outstanding credit card debt? Any debt you leave behind can be paid off using the assets you planned on leaving your loved ones. Depending on how your loans and finances are set up, your family members could be responsible for paying off your debt.
What to do: Take a good look at your current debt and who is on your accounts. Do you have any co-signers? Joint account holders? Authorized users? If it would be a struggle for them to make the payments, you may want to factor the debt into your life insurance policy.
4. Look towards the future.
If you have school-aged children, you can use life insurance to make sure their dreams become a reality. A life insurance policy can help with the costs of test prep courses, school bills, or college tuition.
What to do: What are your loved ones' educational ambitions? Add up the costs so there is enough money set aside for them to pursue their aspirations.
How to Apply for Term Life Insurance
Deciding to buy term life insurance isn't always easy. It means facing the possibility you may not always be around to provide for your family. Use this checklist to work through each step of the life insurance application and purchase process so you can buy a policy with confidence.
1. Talk to your family.
It's tough to find time to talk about things like life insurance with your spouse, partner, or parent. Still, it's important to be proactive and have this conversation before your loved ones are dealing with the aftermath of a life-changing situation. Having a plan in the form of a life insurance policy gives you, your family members, and other dependents peace of mind.
You may prefer to have a third party involved in the discussion, like a life insurance agent, to answer any questions family members may have. Your insurance agent can also help explain how a life insurance policy can provide funds to help care for the needs of dependents, spouses, and children in the event of an unforeseen tragedy.
2. Determine a policy effective date.
After you've talked with your family, determine the date you would like your policy to become effective. Many insurance companies allow you to begin your term life insurance policy the same day you complete your application and are approved!
Besides your personal preferences, what factors should you consider when choosing an effective date for your policy? Let's run through some example scenarios:
- A long-distance trucker may want to put off his effective date until he begins his next leg on the road.
- A single mom with a daughter who is a recent college grad may want her policy to become effective as soon as possible if her daughter doesn't currently have any full-time job prospects.
- A contract laborer may set his policy effective date to the same date he begins work at a new downtown construction site.
The people in these scenarios are either approaching a period of time where they are at increased risk or where family members are more dependent on their income. These are two situations where term life insurance could bring important peace of mind.
3. Choose the length of the term.
Term lengths aren't one-size-fits-all. Consider how long it will be until your children can provide for themselves, when you plan on retiring, and the amount of time left on your car or house payment. Direct offers six and 12-month life insurance terms.
For instance, the contract laborer from the last example might want a six-month policy term length since that's how long he'll be at risk working at the job site. The single mother of the recent grad might prefer a policy with a 12-month term since she feels her daughter needs a little more time to get on her feet.
4. Have personal information handy.
Save yourself a little time during the application process by having the following information ready for the applicant, policy owner, and beneficiary:
- First and last name
- Date of birth
- Social Security number
- Home address
- Phone number
The insurance company will use this information to verify that the applicant, policy owner, and beneficiaries are real.The company will also use this information to periodically check to see if any of their insureds have died by using Social Security records as well as to locate beneficiaries.
5. Have medical records available to reference.
Some insurance companies may require a life insurance applicant to undergo a medical examination. However, Direct Auto doesn’t require a medical exam. We simply ask you to answer some simple health questions.
No matter who your insurer is, though, it’s smart to gather any documents you might need to answer questions like:
- In the last two years, have you ever been diagnosed with, treated for, or been told by a licensed medical professional that you have a disease or disorder of the heart, cancer or tumors, or a disease of the kidneys, liver, or stomach?
- During the past 12 months, have you been hospitalized for diabetes, high blood pressure, asthma, or stomach ulcers?
6. Decide on a payment method and plan.
The last item on your to-do list? Choose your payment method! At Direct, you can pay your life insurance policy in full or select from a standard installment plan. And, Direct General Life does not charge extra fees for a life insurance policy paid in installments.
Other Life Insurance Questions
Still have a question or two about life insurance coverage? Here are some other things you might be wondering.
Can I purchase life insurance policies for my kids?
Through Direct Auto Insurance, parents can purchase a term life policy for their children2. However, if your child is over 18, you must have their express written consent.
If you’re considering purchasing coverage for a child, it may be a good idea to ask yourself, “Why?” Life insurance is generally purchased to help replace someone’s wages should the unexpected occur, as the proceeds of a policy can help pay for everyday expenses like groceries, bills, or car payments. While most children don’t have an income that would need to be replaced, they could have funeral or memorial expenses. If these are costs that you, as a parent, worry about being able to cover for a child, a term life policy could be a good idea.
Am I too unhealthy to get life insurance?
Probably not, but it depends on the life insurance company, the type of life insurance policy, and what you mean by “unhealthy.” Some insurance companies require a full medical exam and ask you to provide your height and weight so they can calculate your body mass index (BMI).
Other companies, like Direct General Life Insurance Company (the carrier Direct Auto represents), don’t require a medical exam at all; but you may be required to answer questions related to your health. For example, Direct General Life asks questions relate to diseases, cancers, tumors, or disorders (like diabetes, high blood pressure, multiple sclerosis, acid reflux, lung diseases other than asthma, etc.) that you may have been diagnosed with or treated for within the past two years. Insurance companies know that no one is perfect, so don’t automatically assume that you won’t be eligible for coverage if you have a medical condition.
Am I too old to be approved for a life insurance policy?
The answer to this one depends on your age, the life insurance company you choose, and the type of life insurance (term vs permanent) you’re applying for. Life insurance quotes tend to be lower and more affordable when you’re young and healthy. The sooner you can get coverage, the better, because as your age goes up, your quote is likely to go up as well.
Can my term life policy be canceled if I get sick?
Let’s say you buy a term life insurance policy with a term of 12 months. About four months into the policy, you’re diagnosed with cancer. Can your term life insurance company cancel on you? The short answer is no. If you pay your premiums, the term life insurance company cannot cancel your policy within the term. With a Direct General Life policy, your renewal is also guaranteed for an additional 2 years without regard to your health so long as the premiums are paid.
What happens if I can’t pay the premium?
Unfortunately, there are some situations in which your term life insurance policy could be terminated, and this is typically one of them. Remember: your premium is the amount of money you, the policy owner, agree to pay for coverage. It’s how you fulfill your end of the agreement with your insurance company. If you stop paying premiums, your coverage lapses. Or if your down payment or one of your premium payments does not clear a financial institution, your insurance company may terminate your policy. It’s important to note termination guidelines tend to vary by the insurance company.
Get a free quote for affordable life insurance!
Direct Auto makes it easy to get term life insurance. How easy? There is no medical exam required. Simply answer a few health-related questions. We also offer flexible payment options so you can pick your payment due date to fit your budget. Plus, when you have auto insurance through Direct, you can conveniently pay for your auto and life insurance policies at the same time and place.
If you're ready to learn more about term life insurance coverage or want a free quote, give us a call at 1-877-GO-DIRECT (1-877-463-4732) or meet with one of our friendly, knowledgeable agents at a Direct location near you.
1 *Individual term life insurance by Direct General Life Insurance Company.Policy Nos: IIC21-12815 and 58TL02010713 (FL). Per day amount based on annual premium for insured 18-50 years old with a $25,000 policy. Additional fee applies. Policy terms and conditions apply. Premium will vary by insured’s age and coverage level selected.
2Written consent required of children 18 and older.