If you die before your time, you want your family to be able to continue the lifestyle to which they are accustomed. If you are the main breadwinner and you lack life insurance, it is quite possible your family would encounter financial problems if you died unexpectedly. Life insurance can give you peace of mind on this point. But choosing the right policy can be a challenge because of the wide variety of options available. A popular option because of its relative simplicity and affordability is term life insurance.
Step 1
Understand the purpose of term life insurance. As its name suggests, this type of coverage stays in effect for a predetermined period, such as 5, 15, 20 or 30 years. During the term of the contract you signed, premiums cannot exceed an amount specified in the agreement. The monthly premium tends to be cheaper than that of other types of life insurance, such as whole life insurance. Term life coverage is an effective way to assure that your family will be taken care of or that large debts will be paid off should you die.
Step 2
Realize that term life insurance does not accumulate cash value. Some types of life insurance have an investment component. Part of your premium goes into a tax-deferred investment account, and this money creates cash value in the policy. You can at some point cash out the policy if you wish. Term life insurance does not work this way. In this respect, it is more like car insurance. You pay your premium each month, and you continue to be insured--there is not much more to it.
Step 3
Determine how much insurance you need. This will vary based on your lifestyle, your debts and the number of dependents you have. One way to arrive at a figure is to calculate how much income you are likely to produce for your family over the course of your lifetime, and buy a policy worth that much. Another is the needs-based approach, looking at what your upcoming obligations are. Obligations may include a mortgage, income for your family college expenses and funeral costs. You then buy insurance in an amount equal to your obligations minus the value of your assets.
Step 4
Recognize that you may outlive your term life insurance policy. Unlike some other types of life insurance, a term life policy eventually ends. At that point, you will not have life insurance unless you also happen to hold another policy. You have the option to extend your policy until you reach a certain age, usually 85 or 95, depending on the state, but your monthly premium will increase dramatically. If your children have reached adulthood by the time the policy ends, you may not need as much life insurance because you no longer have to cover the costs of raising children.
Step 5
Choose a type of term life insurance. Though term life insurance is simple in principle, insurance companies have introduced several variations. In a "straight term" policy, which is the simplest and most popular type, premiums and the benefit stay level throughout the term of the policy. But in decreasing term and annually renewable term policies, that is not the case. Other twists include convertibility privileges, buy-sell agreements and return-of-premium policies. A qualified insurance agent or financial planner can walk you through the options.
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