The true cost of term life insurance

The true cost of term life insurance

How much will life insurance cost you?

That’s a complicated question for a financial product that’s honestly pretty straightforward. But when you’re searching for life insurance quotes, you might not know what to expect. You also might not know what type of life insurance you need ("There are different types?!"), how much you need, or where to even start shopping.

But all of these questions feed back into just how much protecting your family with life insurance will cost. By going through the questions you need to ask about life insurance and seeing how much each question affects your monthly costs, complete with real-world breakdowns, you’ll be able to figure out just how to fit life insurance into your financial plan – and your budget.

What type of life insurance do I need?

You need term life insurance. Next question.

Okay, fine, let’s dive into this a little more. You probably need term life insurance – big names in personal finance like Dave Ramsey, Suze Orman, and Clark Howard all think so.

What is term life insurance? It’s a life insurance policy that is in effect for as long as you pay the premiums for a certain amount of time (aka, the term). Once the term is up, you stop paying premiums and the coverage ends.

Compare that to whole life insurance, the most popular type of permanent life insurance: you purchase a policy and it lasts for as long as you pay for it. With whole life insurance, you also get a cash-value component that acts as a sort of forced savings vehicle that you can potentially withdraw money from later in life.
Whole life insurance sounds like the better deal. So why do so many people suggest term life insurance?

  • Whole life insurance is usually unnecessary for most people. Life insurance exists to cover expenses and debts for your beneficiaries if you as the primary breadwinner are no longer around. By the time you’re older – student loans have been paid off, the mortgage is taken care of, the kids have moved out, you’ve saved for retirement with your 401(k) and IRA – you don’t need life insurance. Why keep paying for what you don’t need? Especially when you’ll be paying more for it with whole life insurance.

  • Term life insurance is more affordable. Whole life insurance has that cash-value accrual component, but the fees that go along with it mean it’s a lot more expensive than term life insurance – up to four times more expensive for a given death benefit. For something that’s going to last you a few decades, you want it to be as affordable as possible, and term life insurance provides just that.

  • You’re better off investing the difference. "Buy term and invest the rest" is a popular refrain in financial circles. It basically means that instead of buying whole life insurance and getting half life insurance policy, half expensive savings vehicle, you should buy a cheaper term life insurance policy and invest the difference elsewhere, where you can likely get a better return.

Overall, buying term life insurance is the better bet. But if you really want the best deal possible you should buy life insurance when you’re young.

See, your life insurance rates are locked in for the entire term at whatever the cost was when you applied. As people get older, we tend to get less healthy, which you probably know if you’ve ever seen people before. That means the longer you wait, the higher your premiums are likely to be (usually increasing at an average of 8-10% per year).

Let’s compare term life insurance quotes at a few different ages, for both men and women. Because everything needs a catchy title, we’ll call this first group our "Single & Ready to #Mingle" shoppers: 25-year-old healthy nonsmokers, no dependents, few expenses, but getting a 15-year, $250,000 policy because they’re savvy and preparing for the future (and also their parents are co-signed on their private student loans, so…):

Life insurance quotes for a health 25-year-old male. $250,000/15-year term
Life insurance quotes for a healthy 25-year-old male. $250,000/15-year term

Life insurance quotes for a health 25-year-old female. $250,000/15-year term

Life insurance quotes for a healthy 25-year-old female. $250,000/15-year term

Now we have the "Baby Boomers" shoppers. They didn’t buy life insurance, but now they’re realizing that their family would need a little money to cover funeral expenses and retirement if anything were to happen.

Unfortunately, these 55 year olds are going to find that for the same policy, their premiums will be more expensive (but still affordable for peace of mind):

Life insurance quotes for a healthy 55-year-old male. $250,000/15-year term
Life insurance quotes for a healthy 55-year-old male. $250,000/15-year term

Life insurance quotes for a healthy 55-year-old female. $250,000/15-year term
Life insurance quotes for a healthy 55-year-old female. $250,000/15-year term

(It’s important to note here that a 55 year old will almost never need the same policy as a 25 year old. He or she might get a lower coverage amount or a shorter term. This is an apples-to-apples comparison to make a point: your life insurance rates go up with age.)

How much term life insurance do I need?

Okay, so we’ve hit the two ends of the age spectrum, but what about everyone in between? The people who need to plan for a while and have kids and a mortgage to take care of? This is our "Married...with Children" group. Our sample quotes are for a 35 year old male and female, and the policies are for 30 years and $1,000,000:

Life insurance quotes for a healthy 35-year-old male. $1,000,000/30-year term
Life insurance quotes for a healthy 35-year-old male. $1,000,000/30-year term

Life insurance quotes for a healthy 35-year-old female. $1,000,000/30-year term
Life insurance quotes for a healthy 35-year-old female. $1,000,000/30-year term

When you have a family and expenses, you need to know how to calculate your life insurance need. Some things to consider are:

  • Your dependents. This includes your spouse and children, but don’t discount the possibility of needing to take care of aging parents. They might be relying on you some day soon. Your dependents rely on you for taking care of everyday expenses, so your life insurance policy should cover those costs.

  • Your debt. The biggest debt you probably have is a mortgage, and your dependents are going to rely on that for years to come. But don’t forget about debt that seemingly only affects you – namely student loan debt, or credit card debt that can be the responsibility of your significant other.

  • College. Your debt might include your own college costs, but you need to think about the future. Starting a 529 savings account for your kids is great, but college is getting (more) expensive quickly, and you may need every year you can get to save up enough to send them to college. Life insurance can be a way to fill that gap.

  • End of life expenses. There’s no way around it: funerals are expensive. Even if you’ve planned for everything else, the $10,000 for a funeral might have slipped your mind. The life insurance death benefit can help cover these costs, giving your grieving loved ones one less thing to worry about.

  • Financial cushion and other savings. Beyond immediate and obvious expenses, you can also provide a financial cushion for your dependents, whether it’s money so your spouse doesn’t have to worry about work and can focus on the kids, or you want to make sure the retirement fund is filled when you’re not around to make contributions to it any longer.

Now, your need may change over time. You don’t want to burden your family with your old student debt, but you’ll pay that off eventually. The mortgage is important, but hopefully you’ll pay that down, too. Your kids will have gone to college and strike out on their own. Suddenly that million dollars looks like too much money.

One alternative to buying a single large policy is buying several smaller, overlapping policies. Buy a $500,000, 10-year policy; a $300,000, 20-year policy; and a $200,000, 30-year policy. Here’s an example:

Using the ladder strategy to save money on life insurance
Using the ladder strategy to save money on life insurance

This is called the ladder strategy, and you’re essentially frontloading your protection. You step down your coverage – and the amount you pay each month – as you begin to pay off or rid yourself of financial obligations. (Parenting advice: don’t ever refer to your kid’s college graduation as "ridding yourself of financial obligations.")

Even better, as you can see above, buying multiple smaller policies can save you 50% on your total term life insurance premiums. It’s hard to beat getting the coverage you need at an extra-affordable price.

Where should I buy life insurance?

Well, I’m partial to PolicyGenius, but there’s an honest-to-goodness, doesn’t-involve-my-paycheck reason for that.

You can’t get term life insurance cheaper by buying directly from the life insurer. For a given policy from a given insurance carrier, you’ll pay the same no matter where you go. That’s because life insurance rates are regulated by each state - and everyone who sells a company’s life insurance must do so from the same pricing tables approved by the state regulator.

But that doesn’t mean you’ll get the best deal everywhere you shop. A captive agent, for instance, will only deal with one or a couple carriers, so you won’t get the full breadth of options to find the policy that’s right for you. That’s why you should shop with independent brokers like PolicyGenius: we work with the nation’s top-rated life insurance companies, so you can see all of the policies available.

Independent brokers can also help you after you apply. After you submit your application, you will go through the underwriting process, where the insurer will get a picture of your health to see how risky you are to insure over the term of the policy. Remember the term life insurance quotes we got for the "Married...with Children" group? Thirty-year, one million dollars? Let’s say those same people are now "Fast Food Fans" and have high cholesterol. It was just uncovered during the underwriting process, and they haven’t been taking medication to control it. Since health is a main factor in determining your life insurance rates, here’s what it does to their rates:

Life insurance quotes for a high cholesterol 35-year-old male. $1,000,000/30-year term
Life insurance quotes for a high cholesterol 35-year-old male. $1,000,000/30-year term

Life insurance quotes for a high cholesterol 35-year-old female. $1,000,000/30-year term
Life insurance quotes for a high cholesterol 35-year-old female. $1,000,000/30-year term

As you can see, premiums can go up by a lot. In cases like this, an independent broker can either work with an insurer to get you a better classification (and therefore a lower rate), or they can shop your application around to other insurers to see where you can get a better deal. There’s usually a big difference between the carriers with most affordable policy and the highest-cost policy, and you might not even know that’s an option.

Let’s say you did know you have high cholesterol. We’ll ask that question – and all of the other important ones – when you’re getting your term life insurance quotes so that your quotes are as accurate to the actual rates you’ll be offered after you apply.

Sample quotes are great, but there’s no substitute for getting quotes that are tailored to your particular situation. That’s why you should get free, anonymous quotes today (remember, rates go up as you get older!). Keep in mind everything that we’ve talked about, and you won’t have any problem figuring out how life insurance fits into your financial plan.