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How to Determine the Right Amount of Term Life Insurance

    When looking at term life insurance policies, you’ll see death payment benefits in varying amounts. Many plans offer a benefit that is between $100,000 to $500,000, but 7-figure policies are also available. What is the right amount to look at having for your policy? One of the easiest ways to determine the right amount of insurance to have is to look at your current income. Then multiply that number by 5 – 15 to come up with the right amount to have with your term life policy.

    Determine which multiplier to use depends on what your beneficiaries would do with the benefit payout.

    Multiply By 5: You would use this multiplier to provide an income buffer of 5 years for your family. If you earn $50,000 per year, then you’d want a $250,000 policy. This is enough to pay off a mortgage, provide living expenses, start a college fund, and still pay for final expenses.

    Multiply By 15: You would use this multiplier for long-term income needs. Earning $50,000 annually would mean needing a $750,000 term life policy. Instead of paying expenses, this type of policy would have the benefits invested so returns could be earned annually. If $750,000 could earn 5%, then it could earn nearly $40,000 of income every year AND still have the base benefit available for emergency expenses.

    The primary goal of a term life benefit is to replicate the income of someone who dies unexpectedly over whatever period that income may be needed. Younger individuals and families will typically want to use the 15 multiplier for their income or as close to it as they can afford.

    Older individuals or couples without children may find that the 5 multiplier for their income is better suited to their needs.

    It can be difficult to think about death. Having an open discussion with your family about what their needs would be if something unexpected happened to you can make it a lot easier to find the right term life insurance policy which meets your current and future financial needs.

    How to Select the Best Term Life Insurance Policy

    For term life insurance policies, the least expensive option is not always the best option. Different insurers offer unique provisions within their policies that may not provide identical benefits. It is necessary to check what each insurer and policy offers, including any structured renewal increases, to find the best possible rates.

    Here are the key points to consider when selecting the best term life policy for your specific needs.

    #1. Always ask about renewal rates. If you want to renew your policy after the contracted period ends, then look at what the renewal rates will be. The policies with the lowest monthly premiums tend to also have the highest renewal rates for your premiums.

    #2. Look at the “No Exam” stipulations. Most insurers have an age limit for when their “No Exam” term life policies will no longer be issued. Automatic renewals can be canceled if your age disqualifies you from having a policy which doesn’t require a medical exam.

    #3. Find out what the grace period happens to be. Almost every term life policy has a grace period in place after it is first issued. If something happens to the policy holder during the grace period, reduced benefits will be paid. Grace periods can range from 30 days to 2+ years, depending on the type of policy you choose.

    Note: Grace periods may also apply to when payments are received. Some insurers may be able to cancel a term life plan if a monthly payment is not received by a due date.

    #4. Are you looking for a convertible policy? Some insurers offer the option of converting a term life policy into a whole life policy once a certain age is reached or specific health requirements are met. Make sure you’ll be able to qualify for the conversion before agreeing to any term life policy.

    #5. How long will it take for benefits to be issued? Benefits are typically paid when a qualifying event occurs. A beneficiary will usually need to submit a certified copy of a death certificate to make a claim. Insurance companies are usually allowed up to 30 days to review a claim, but some policies may request more time than that.

    Low monthly payments are a good way to judge how affordable a term life insurance policy may be, but it may not be reflective of the value you’ll receive. Look at each of these key points as you review an offer so you can find something that best suits all of your needs.

    Christopher - BSc, MBA

    Christopher - BSc, MBA

    With over two decades of combined Big 5 Banking and Agency experience, Christopher launched Underbanked® to cut through the noise and complexity of financial information. Christopher has an MBA degree from McMaster University and BSc. from Western University in Canada.

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