Term or permanent: the first decision
Almost everything sold falls into one of these two families, and the difference between them is not price: it is how long the protection lasts.
- Term. It covers a fixed period, normally ten, twenty or thirty years. If you die within the term, your family collects. If the term ends and you are still here, the policy ends and there is no refund. It is the cheapest per dollar of coverage.
- Permanent. It has no expiration date as long as you pay it, and part of what you contribute builds into a cash value you can access while alive. It costs considerably more for the same amount of coverage.
Neither is better in the abstract. The right question is how many years someone will depend on your income: if those are the years left until your children finish school and the mortgage is paid off, a well calculated term policy does that job for far less money.
The most common trap
Comparing the price of a term policy with a permanent one and concluding that one is expensive and the other cheap. They are not doing the same job. It is like comparing renting with buying: the answer depends on how long you are staying.
How much coverage is actually needed
The amount does not come from a hunch or from whatever the advertising offers. It comes from a simple sum you can do in two minutes.
- Income to replace. What you earn a year times the years you want covered. Usually until your youngest child is independent.
- Debts. Mortgage, car loans, cards. Everything you do not want anyone left having to pay.
- Final expenses. The funeral and immediate costs, which in the United States are not a small figure.
- What you already have. Subtract the policy at work and any policy already in place.
The work policy mistake
Many employer policies cover one or two times your annual salary, which sounds fine until you compare it to a mortgage. And they almost always stay with the company when you leave. Counting on it as if it were your plan is the oversight I see most.
What they ask and why health matters so much
The price of a life policy is set by risk, and that risk is measured with three things: your age, your health and your habits. Nothing else.
- Age rules. Every year you wait, the premium goes up. Not as a punishment: it is arithmetic. The cheapest policy you will ever see is today's.
- The medical exam. Many policies require it, though there are more and more no-exam or simplified issue options, in exchange for a somewhat higher premium or a lower maximum amount.
- Telling the truth. Hiding a condition or tobacco use can lead the insurer to deny the claim exactly when your family needs it. It never pays off.
If you have been turned down
A denial from one insurer does not close the door. Each one assesses health conditions by its own criteria, and there are guaranteed issue products built for exactly these cases. Tell me about it and we look elsewhere.
Beneficiaries, final expense and what happens afterward
The part that gets explained least, and the one that really decides whether the money arrives quickly or sits in paperwork for months.
- The beneficiary. This is who collects. You name them when you buy and you can change them. It is worth naming a secondary beneficiary too, in case the first is gone.
- Keep it current. A divorce, a birth or a death changes who you want the money to go to, and the policy does not find out on its own.
- Final expense. These are small policies meant for the funeral and immediate costs, with simpler health requirements. They are for that, not for replacing an income.
Tell whoever is going to collect
A policy nobody knows exists helps nobody. Tell your beneficiary that you have it, which company it is with and where you keep the document. It is free and it prevents the worst outcome.
