Family life policy. How to shop for term life insurance, Clark Howard

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A lot of people shy away from life insurance simply because they don’t understand it. But it’s time to change that…

If you’ve got children or other financial dependents, you need life insurance!

It’s distressing to me how few people with young kids have life insurance. The problem is the insurance that’s best for people with dependents is not touted by the industry as a general rule.

Stay-at-home spouses have a special need for life insurance, too. A recent survey from Salary.com found that the ‘salary’ such parents earn by dealing with laundry, kids, cooking, etc., is more than $143,000!

That’s more of an attention-grabbing number than anything else because stay-at-home parents don’t actually ‘earn’ that, but you get the idea.

Should a stay-at-home spouse pass away, the remaining parent would have to suddenly pay for childcare and everything else a stay-at-home parent does on a day-to-day basis. That’s why it’s essential the parent at home have a policy on their life. There’s a definite ‘insurable need’ there.

Other examples of people who need life insurance would include two-income couples with no kids if each person relies on the other’s income to pay monthly bills.

Should you get life insurance on your children?

The answer is a resounding no! Children don’t earn any income; they actually cost you money. So there’s no insurable need there.

Too often, we’re sold insurance products with massive commissions and a high cost. That’s a formula for failure when you have to pay the premium, and it sets too much of us up for a lapse in coverage.

Anecdotally, I’ve heard that 25% of people who buy life insurance stop paying on the policy in the first three years. By the 10-year mark, it’s almost 50% of us who quit paying. So you pay all that money to wind up with a big, fat goose egg.

What you need is a policy that’s easy to buy, easy to own and cheap!

Term insurance quote online

Term life insurance is the way to go

Buying what’s called ‘level term life insurance‘ is simple and costs practically no money at all. The following illustration is courtesy of PolicyGenius.com:

‘Level term’ means you pay one flat rate year after year for the length of the policy. This policy will replace your income should you die prematurely.

You buy it for periods of 20 or 30 years and the premium stays the same during the life of the policy.

Women’s coverage is even cheaper because they generally go to the doctor and take care of themselves! So if the stay-at-home spouse is a woman, you generally want to buy a level term policy for 15 or 20 years, depending on the age of your children.

Where can you shop for term life insurance online?

Shopping for term life insurance is easy on the Internet. You can comparison shop for quotes at any of a number of sites like:

If you’re not comfortable shopping and buying insurance on the Internet, that’s fine. Simply go buy a money magazine and you’ll see ad after ad of companies selling life insurance. Some respected ones I like include Amica Mutual and even USAA.

Certain health conditions make insurance more expensive or even unavailable. If you have such a condition, you’re what’s known as ‘rated’ in the industry, which means you will pay more money than the example in the chart above.

Should you get a life insurance policy with no medical exam?

Some companies will sell you a level term in a guarantee issue without a medical exam. In plain English, that means you won’t have to pass traditional medical underwriting where they come to your home and draw blood.

Instead, these providers use an algorithm and info in existing databases to set your rate.

In many cases, you’ll get a decision in as little as 20 minutes after you complete your online application. But there is a trade-off…

These so-called “simplified issue policies” that only involve you answering a few health-related questions rather than going through a physical, blood test, etc. are often more expensive than their medically underwritten counterparts.

Low life insurance quotes

It’s also important to note that these policies are dependent on you being truthful in answering the survey questions — if you’re less than honest, you run the risk of your policy being voided.

Simplified issue policies tend to work best for people who have medical issues. If that doesn’t describe you, you’re probably going to find yourself paying too much for a simplified issue policy.

In addition, we’ve got a couple other no-medical-exam providers here.

Warning: Why you don’t want to consider a permanent policy

Whenever the topic of life insurance comes up, I get a lot of questions about permanent policies — universal life, variable universal life (VUL) and whole life.

Let me just begin by saying this: You should never buy VUL and/or universal life under any circumstances. They’re junk, snake oil, hideous, rotten, terrible and just about any other negative descriptor you can think of.

They’ve blown apart the wallets of so many people. Here’s what you need to know to protect yours…

Avoid anything with ‘universal’ in the name

I have long said anything that has the word ‘universal’ in it is radioactive. First, these plans have huge commissions for the agents that sell them. But the worst part is these policies have enormous fees and often run out of money.

If you can’t meet what’s called a ‘capital call,’ where you have to come up with extra money, your account that you poured all this money into gets wiped out and then you have a giant tax liability on your hands.

With variable or indexed universal life, chances are you’ll be promised — in mind-numbing language going on for page after page — that you will get a magic policy that’s a savings account, an investment account and an insurance account all in one.

The policy illustrations will show you that you’d pay premiums for some time and then magically the policy would take care of itself. It’s pitched as a magic-carpet policy that after a while would fly on its own but you’d have the benefits of the policy.

In practice, it’s hasn’t worked out that way.

Mortgage term life insurance

In one case, The Los Angeles Times reported a man named Philip was paying $25 a month for life insurance over the course of 23 years.

He then got a notice that his premium was going from $25 to $510 each month! If he didn’t pay, he would lose everything he’d paid over the years and there would be no death benefit for his wife when he died.

So suffice it to say, you should avoid VUL and universal life at all costs.

Whole life only works for a sliver of the population

Whole life, meanwhile, is not a crooked deal like VUL and universal life.

But it’s only a good choice if you are ultra high income earner — earning about $400,000 annually. If that’s you, you can benefit from some tax advantages that come with a whole life policy.

But for everyone else, stick with level term life insurance.

Keep these pointers in mind as you shop for term life

How much life insurance do you need? The simplest rule is 10 times your income.

Look for insurers that are rated A++ from A.M. Best as a signal of their financial strength and their likely claims-paying ability down the road.

Only buy life insurance where you work if you have health problems. Otherwise, I prefer you to qualify and go through medical underwriting so you can buy a policy on your own. Most of us don’t stay at the same place forever and you may not have a right to take that insurance with you.