Term life insurance basics
Term insurance policies generally have fixed premium rates that provide life insurance coverage for a specific length of time, known as the term. Policies with 20-year terms are most popular, but shorter or longer terms are also readily available from many of the best term life insurance companies.
If you are a young family on a budget, term life offers the biggest bang for your buck. Compared to permanent life insurance policies, these plans often provide the largest death benefit for the lowest premiums.
Three factors have the greatest impact upon term life insurance rates:
1. Age
2. Gender
3. Health class
Life insurance risk classifications
Of the three primary factors, your risk class is the one which you have the most control. Most life insurance companies require the completion of a lifestyle questionnaire and medical exam. The company is looking to see whether you use tobacco, maintain a health weight, have any existing medical conditions or have a family history of health problems.
Life insurance companies generally rely on a series of standard and preferred risk categories. The better your classification, the lower you can expect your term life insurance rates to be. For example, the Savings Bank Life Insurance Company of Massachusetts uses the following six classifications:
1. Preferred Plus Non-Nicotine
2. Preferred Non-Nicotine
3. Select Non-Nicotine
4. Standard Non-Nicotine
5. Preferred Nicotine
6. Standard Nicotine
Low cost life insurance and the best time to buy
You may be thinking that it would be better to wait until you have more room in your budget before buying life insurance. That could be a mistake. While your financial situation may improve, there can be a significant "cost of waiting" if you put off purchasing life insurance. According to the American Council of Life Insurers, those who are younger and healthier will have the lowest rates.
New York Life has identified three ways in which postponing the purchase of life insurance can cost you:
1. Premiums can increase as you age
2. You may develop a health condition
3. You may pass away unexpectedly, leaving your family without financial protection
Age as a key factor in premiums
Along with your health, age plays the biggest role in determining premiums. Why? Because life insurance rates are based on how much risk there is that you are going to die. If you are 33 years old and purchase a 20-year term life policy, there is a very good statistical chance that you will make it to age 53.
Now, if you are 53 years old and purchase 20-year term insurance, your mortality risk is considerably higher. To compensate for increased risk, the company charges higher premiums.
Gender can also influence term life rates for similar reasons. Statistically men have shorter life spans than women, so therefore their rates often increase at a higher rate as they age.
By purchasing when you are young, you can lock in low cost life insurance rates. If you think you will need more protection or a longer term in the future, it is still a good idea to buy when you are young. Also, look for term life plans that offer guaranteed renewals or convertible policies that can later be transitioned to permanent life insurance.
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