Term Life Insurance: What You Need to Know Before You Buy

Take a trip back in time to right before your 16th birthday. If you were like me, the anticipation and the freedom of driving were at the forefront of my mind. It was three weeks before my 16th birthday—a cold Wednesday on February 5, 1992. The smells of wood-burning stoves lingered in the air mixed with the crisp scent of winter in our small southern Utah town of Panguitch. I remember that day vividly, minute by minute—going to school, driving in the driver’s ed car. I even remember the names of everyone I was with that day.

The leafless trees lined the banks of the river, and the little snow that graced the ground reflected the fading light as darkness descended early—typical of this time of year. My father, a veterinarian, often returned home late from his rounds, but that night, it was different. Something didn’t seem right as we did our best to reach him over a CB radio.

With red and blue lights flooding the front room of our home, there was a knock at the door, shattering the evening’s calm. It was followed by my mother’s cries. My heart plummeted. A police officer stood at our doorstep, delivering the news that my father was involved in a collision coming home from a vet call on the same road I had traveled earlier that day while learning to drive. He was gone, taken from us instantly at the age of 39.

Why share this with you? Because my dad was a do-it-yourselfer, like many WCIers. However, he did need the occasional friendly swift kick and a point in the right direction. There was an agent giving guidance or advice showing him why having life insurance was important to my mom, me, and my three younger sisters. Thankfully, he did have life insurance when he died, and we were OK financially because of the choices my parents made.

If you can have the same peace of mind life insurance can bring after reading this and you take action, then I’ve done my part for today. Even if you're young with no one depending on you today, chances are your circumstances will change. It may be smart to buy term life insurance when you're young and healthy rather than waiting.

What Is Term Life Insurance?

Growing up in a small community, my father had a strong desire to raise his family in the countryside. As a thrifty small-town veterinarian, our household operated on minimal cash flow. Term life insurance played a crucial role in our financial planning, allowing us to maximize our life insurance protection while keeping expenses low. This type of insurance provides coverage for a predetermined period, typically ranging from 5-30 years (some policies will go as long as 40 years). There are yearly renewable term options where the premium goes up every year, as well. If the insured person were to die during this term, the policy would pay out a death benefit to the named beneficiaries.

Unlike permanent life insurance policies, such as whole life or universal life insurance, term life insurance doesn't build cash value and only provides coverage for the specified term. The premiums for term life insurance tend to be more affordable than those of permanent policies, making it a good option for individuals looking for straightforward protection for a specific period. Additionally, some term life policies offer the flexibility of renewal or conversion to permanent coverage, allowing for adjustments as the insured's needs change over time.

Types of Term Life Insurance

Level Term Life Insurance

Probably one of the most common types bought, level term life insurance is a type of life insurance policy that provides coverage for a specified period, typically ranging from 5-40 years. During this period, the premium payments and the death benefit remain fixed, hence the term “level.” This means that your premiums are locked and stay the same over time, making insurance expense budgeting easier.

If you die during the term of the policy, your dependents receive the death benefit tax-free. This money can be used by loved ones to replace lost income, cover living expenses, pay off debts, or meet other financial needs.

One of the key benefits of level term life insurance is simplicity and predictability. Since the premiums and death benefits remain unchanged throughout the term, you can easily understand and plan insurance needs without worrying about fluctuating costs. Additionally, level term policies are often more affordable compared to permanent life insurance options, making for an attractive choice when seeking basic coverage.

Annual Renewable Term Life Insurance

With this type of term life insurance, your coverage lasts for one year. At the end of the term, you have the option to renew it for another year without needing to undergo a medical exam. The premiums typically start lower than other types of life insurance, which can be appealing if you're on a tight budget. However, the downside is that the premiums increase each year as you get older, which means it can become more expensive over time. This type of insurance is best suited for individuals who need temporary coverage or who anticipate financial needs changing in the near future.

Group Term Life Insurance

Group term life insurance is a cool employee benefit, providing a financial safety net for workers and their families. It’s especially handy in a situation where a doctor isn’t insurable. The group plan will then provide a minimal death benefit to the family or a designated beneficiary. For example, if a doctor is employed by a hospital, the hospital typically provides group term life insurance as part of the benefits package. This policy covers the doctor as long as they remain employed with the hospital. The cost of the plan is generally covered by the employer. However, sometimes group employer plans allow employees to “buy up” more insurance by going through health underwriting.

Let’s look at an example. Suppose Dr. Jones works at a major hospital, and they're covered by a group term life insurance policy worth $100,000. If Dr. Jones dies unexpectedly, the $100,000 death benefit would go to Dr. Jones’s designated beneficiaries (family), providing financial support. However, considering the high financial responsibilities that come with a medical career—such as student loans, a mortgage, and family expenses—this coverage might not be sufficient. Dr. Jones needs more coverage, and they might decide to purchase supplemental life insurance through the hospital to increase the total death benefit. The hospital plan may allow this with health underwriting, but it will put a benefit cap on how much it’ll offer above the base plan provided by the employer. Let’s say it’s 10x more than what the group plan offers. This supplemental policy, which Dr. Jones would pay for out-of-pocket, could provide an additional $1 million in coverage.

While these policies are generally more affordable than individual life insurance plans bought from an agent, they often come with a significant limitation: the coverage ends if the doctor leaves the hospital or is terminated. However, sometimes they can be ported or taken with you. I’ve changed jobs and applied to take employer-sponsored term insurance only to find the premiums were nearly 10x what they were when I was an employee. There’s a significant risk to an insurance company if you think about those who want to take their insurance with them after terminating or leaving an employer. It’s typically those who are uninsurable who want to port the coverage. That wasn’t the case with me. I just wanted to keep the insurance, but I found the cost prohibitive. Still, if I were sick or needed the coverage, I probably wouldn’t have batted an eye. That's why it’s advisable to consider buying additional individual life insurance outside of your employer—to ensure continuous coverage and financial protection in the event there’s a job switch down the road.

How Much Life Insurance Should You Buy?

In 2017, a close friend called to tell me he’d just been diagnosed with stage 4 colon cancer, and he had been given a prognosis of only a few months to possibly a year to live. A few weeks prior, we talked about how his term life insurance was about to expire. He had wisely purchased an additional policy a few months earlier, anticipating the end of his current one. When a term life insurance policy reaches the end of its term, it either expires or can be renewed at a much higher price. Most people choose not to renew because of the prohibitive cost, but my friend and his wife decided to pay the higher premiums and renew the policy. If I remember correctly, the monthly premiums jumped from around $50 to nearly $1,000. However, the additional benefit received by his family after he died was well worth the extra cost incurred during his last few months.

Faced with the certainty of death, my friend wanted more coverage for his family. This raises an important question: if you were diagnosed with an incurable disease tomorrow (or 20 years from now) and you had a family depending on you, how much life insurance would you want or need? Unfortunately, we don’t have a crystal ball to foresee our future health or financial circumstances. My friend didn’t know he’d get cancer at 46, leaving behind a wife and four kids with many earning years still ahead. Similarly, my father didn’t know he would pass away at 39, also leaving behind his wife and four children. Consider what you’d want to leave behind and what you’d want to ensure if you faced a similar situation.

Believe it or not, the insurance company will not sell you too much life insurance or more than for which you qualify. There is a limit! The amount you can buy is tied to your income, age, and financial obligations. Insurance companies generally use a multiple of your annual income to set a maximum limit. For instance, younger physicians might be allowed to purchase 20-30 times their annual income, while older individuals might be limited to 10-15 times their income.

Example 1: 27-Year-Old Resident Physician

• Age: 27 years old
• Annual income: $50,000
• Multiple: 20-30 times annual income

Maximum life insurance coverage:

• Low end: 50,000×20= $1 million
• High end: 50,000×30= $1.5 million

A 27-year-old resident physician making $50,000 a year could potentially qualify for $1 million-$1.5 million in life insurance coverage. Keep in mind that a resident could petition an insurance company for more coverage based on their future earnings potential

Example 2: 30-Year-Old Doctor

• Age: 30 years old
• Annual income: $350,000
• Multiple: 20-30 times annual income

Maximum life insurance coverage:

• Low end: 350,000×20= $7 million
• High end: 350,000×30= $10.5 million

A 30-year-old doctor making $350,000 a year could potentially qualify for $7 million-$10.5 million in life insurance coverage.

Example 3: 50-Year-Old Doctor

• Age: 50 years old
• Annual income: $400,000
• Multiple: 10-15 times annual income

Maximum life insurance coverage:

• Low end: 400,000×10= $4 million
• High end: 400,000×15= $6 million

A 50-year-old doctor making $400,000 a year could potentially qualify for $4 million-$6 million in life insurance coverage.

These examples illustrate how insurance companies determine the amount of life insurance coverage based on income and age. Each individual's specific situation, including health and financial obligations, will also play a role in the final determination.

You may not need to buy that much life insurance, but with the rising costs of goods and services, it's wise to review all your current and future expenses. Consider potential inflation when deciding how much coverage to purchase. WCI Founder Dr. Jim Dahle recommends starting with anywhere from $1 million-$5 million. By the time you reach your 50s and 60s, you might achieve financial independence (FI). However, it's still important to understand how the insurance industry works and what coverages might be available to you.

Living Benefits in Term Life Insurance

Term life insurance typically doesn't offer built-in living benefits like permanent life insurance policies do. However, most insurance companies offer optional riders that can provide living benefits for term life insurance policies. Here are a few common ones:

Accelerated Death Benefit Rider

Some term life insurance policies offer an accelerated death benefit rider that allows the policyholder to receive a portion of the death benefit early—typically 50%-75% up to $500,000—if they are diagnosed with a terminal illness, typically with a life expectancy of 12 months or less. Most times, this rider is baked into the cost of a term life insurance policy.

Critical Illness Rider

This rider pays out a lump sum if the insured is diagnosed with a critical illness covered by the policy—such as cancer, heart attack, or stroke. The funds can be used to cover medical expenses or other financial obligations. This shouldn’t be confused with disability insurance.

Disability Income Rider

While not as common, some insurance companies offer a disability income rider for term life insurance policies. This rider provides a monthly income if the insured becomes totally disabled and unable to work due to injury or illness but lacks a lot of important features found on stand-alone disability policies.

Return of Premium Rider

This rider refunds all or a portion of the premiums paid if the policyholder outlives the term of the policy. It provides a financial return if the insured does not die during the term, but it can add a substantial amount to the premium cost on a term life insurance policy.

Waiver of Premium

This rider will waive the cost of the policy if the policyholder becomes totally disabled. Typically there is an elimination period or waiting period of six months before the premiums would be waived on a term life insurance policy.

 

It's important to understand most of the riders above are optional, and they may incur an additional cost. Additionally, the availability of riders and their specific terms can vary between insurance companies. If you're interested in adding living benefits to a term life insurance policy, it's best to discuss your options with an insurance agent. You can talk to a WCI-vetted agent to see what’s available.

Conversion Option on Term Insurance

I will not get into the debate on whether permanent life insurance is for you. However, there will be circumstances where it may make sense. Some term life insurance policies can include an option to convert a policy to permanent insurance, like whole life or universal life, regardless of future health changes. This maintains the original underwriting classification, even if health has declined. Some insurers limit conversion to a specific timeframe, while others may allow conversion for the entire term. If considering a conversion in the future, it may be smart to go with a financially stable insurance carrier with a strong product portfolio.

Qualifying for Term Life Insurance: Be Prepared

Underwriting for term life insurance involves looking at health, lifestyle, and other risk factors to determine eligibility and premiums for coverage. This process includes reviewing medical history, conducting medical exams, evaluating lifestyle habits, considering family medical history, and examining financial stability. Ultimately, underwriting determines the terms of the insurance policy and the premiums you will pay. Here’s a list of what to expect:

1. Health history: Review of past and current medical conditions, surgeries, and treatments.
2. Lifestyle factors: Assessment of habits like smoking, alcohol use, and participation in risky activities.
3. Family history: Consideration of hereditary diseases and family members' health.
4. Occupation and hobbies: Evaluation of job-related risks and engagement in hazardous activities.
5. Medical exams: Requirement of physical exams, including blood tests and EKGs. Since COVID, some carriers have relaxed in-person exams and have even waived them depending on how much insurance you’re applying for.
6. Medications: Review of current and previous prescriptions and their implications. The insurance carrier will more than likely do a script canvas.
7. Driving record: Assessment of driving history, including violations and accidents.
8. Financial standing: Examination of income, debts, and financial stability. Have you ever declared bankruptcy?
9. Age and gender: Consideration of age and gender-related mortality risks.

These factors collectively determine your eligibility and premiums for term life insurance coverage.

The Bottom Line

I hope you've grasped just how crucial this topic is to me, and I urge you to take decisive action. Maybe my words serve as the kick you needed, much like my dad did all those years ago. Don't put off getting life insurance or disability protection. People are counting on you—now and in the future. Losing my dad when I was 15 and seeing my friend fight cancer at 46 made me realize how uncertain life can be.

Healthy individuals face unexpected challenges every day. It's tough to talk about, but I feel morally obligated because, just like me almost 35 years ago, loved ones are relying on you. You mean everything to them, and knowing everything will be OK if you don't walk back through the front door of your home one day is the reassurance they need.

What do you think? Do you have term life insurance? What kind of policy and riders do you have? Do you know anybody who's benefited from it?

 

The White Coat Investor may receive compensation from White Coat Insurance Services, LLC; licensed in all states including MA and DC; CA license #6009217; NY license #1758759 (exp. 6/2025); Registered address: 10610 S. Jordan Gateway, #200 South Jordan, UT 84095. This does not affect the cost or coverage of insurance.