Explaining Term Life Insurance
Life insurance: you may have heard that it's important to have, but what exactly is it? And do you really need it? A life insurance policy offers financial protection for your loved ones in the event of your death and can help them handle your funeral expenses, pay bills, and live comfortably.
Term life insurance is an affordable type of life insurance coverage because you only pay for the coverage you need for the amount of time you need it.
If you're curious about the benefits of term life insurance and whether you might be a candidate, keep reading. This guide breaks down the basics of term life insurance coverage, including how to calculate how much life insurance you need and how to apply for coverage.
Learning the Basics of Term Life Insurance
Life insurance is a contract between policyholder and insurance provider. You (the policyholder) agree to make your payments, and the insurance company agrees to pay benefits to your loved ones – your beneficiaries – when you die.
A life insurance policy can ensure your loved ones are taken care of in the event of your unexpected, untimely death. Life insurance benefits come in the form of cash payment, either in one lump sum or in increments, depending on which option the policyholder selects.
Term insurance is a life insurance policy with a pre-set amount of coverage guaranteed for a specific amount of time or "term." As long as you pay the premium, your beneficiaries would receive your policy's proceeds, usually tax-free, if you died during the term.
This type of policy can be affordable because you pay only for the coverage you need for the amount of time you need it. Many life insurance providers offer payment plans to make purchasing life insurance more manageable. Generally, a policy's coverage and rate are guaranteed until the term ends. Once the term is up, rates are subject to change.
Do I need term life insurance?
No matter your age, term life insurance can help support your family and loved ones should the unthinkable happen. A term life insurance policy can give you and your loved ones peace of mind regarding your family's financial security. It could help cover unexpected medical expenses, funeral costs, school bills, and income loss after your passing. You can insure yourself, your spouse, and your child (minimum age 18 years old, maximum age 60 years old).
Who gets the benefits of my life insurance policy?
As the policyholder, you get to designate the beneficiary or beneficiaries for your policy. If the unthinkable happened, your beneficiaries would receive the benefits listed on your policy, as long as the term of your policy has not run out.
Clarifying Term Life Insurance Coverage
How much life insurance coverage can you get? Depending on the state you live in, 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.
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. When you sign up for a policy, you choose who your beneficiary (or beneficiaries) will be. They could be your parents, spouse, children, grandchildren, or other loved ones.
Life insurance offers financial protection for your loved ones, so they don't have to scramble to make ends meet on their own. Here are four things term life insurance can cover:
1. Burial Expenses
Did you know the average funeral costs $7,640? 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. For more information, check out our infographic about the cost of a traditional funeral.
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.
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 "can't-live-without" contributions
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 comfortably 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.
The average funeral costs $7,640, which typically includes a funeral service, transportation, and burial. You can keep funeral costs low by shopping around different funeral homes, picking a simple casket, or opting for direct burial or cremation.
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.
For instance, when it comes to credit cards, a joint account holder could be responsible for the unpaid bills. Authorized users, however, would not be responsible for the outstanding balance. Life insurance can make sure debts are taken care of in the event of your passing.
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.
5. Get a life insurance quote and get insured
Add up the totals from steps one through four. What's your grand total? $15,000? $25,000? With your number in mind, it's time to get a life insurance quote! Go online, call at 1-877-GO-DIRECT (1-877-463-4732), or stop by a Direct location near you. Our friendly life insurance agents can help you get the coverage that's best for your needs, all at a price you can afford.
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 since 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. Calculate the amount of coverage you want
Next, determine the right coverage amount for your needs by asking yourself these questions:
- How much will be needed at death to meet immediate obligations? (uncovered medical bills, funeral costs, or outstanding debts)
- How much future income is required to sustain the household?
Direct offers term life coverage from $10,000 to $25,000.
4. 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.
5. 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. Should the unthinkable happen, the insurance company will also use this information to verify the insured's death using Social Security records and locate beneficiaries.
6. Have medical records available to reference
Some insurance companies may require a life insurance applicant to undergo a medical examination. Direct does not require a medical exam – just answer a few simple health questions. It's smart to gather any documents you might need to best answer these questions:
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 disease of the kidneys, liver, or stomach?
During the past 12 months, have you been hospitalized for diabetes, high blood pressure, asthma, or a stomach ulcer?
7. 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.
If you're worried about the cost of term life insurance, don't worry just yet. Life insurance is more affordable than you might realize! At Direct, term life insurance costs less than 50 cents a day.*
Get a Free Quote of 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.