Life Insurance

How Term Life Insurance Works

Ethos Life · Aug 19, 2020
Father hugging son
You may have heard of life insurance. You may have even read that it’s a great way to protect your loved ones if you die. But if that’s all you know about life insurance, chances are you’re still a bit confused.

Don’t worry, you’re not alone. Less than half of all Americans have any form of life insurance, and 26% of Americans don’t even know what it is (2017 LIMRA Insurance Barometer Study).

So, What Exactly Is Life Insurance?

Life insurance is a form of protection. It’s a benefit that is typically paid in a lump sum on a tax free basis to your loved ones in the event of your death, allowing them to maintain their quality of life and continue pursuing their dreams without an additional financial burden, and providing you peace of mind.

Life insurance is not required like some other forms of insurance, but if you have someone who relies on you and your income, it’s a necessity.

Fortunately, it’s never been easier to get life insurance.

Not all life insurance is the same. Policies vary based on length, cost, and what they cover; but at a high level, there are two types of individual life insurance: term and permanent life insurance. We’re going to dive deeper into term life insurance below, but you can find more information on permanent life insurance and how it differs from term here.

What Is Term Life Insurance?

Term life insurance is a simple, straightforward, and budget-friendly type of life insurance. A term life policy can cost just a few dollars per month and covers you or your loved ones for a designated period of time (the term). When the term is up, you can choose to renew, apply for another policy, or let it expire.

Your beneficiaries are the people you designate to receive your policy death benefit payout. If you pass away during the term, your beneficiaries will receive the death benefit in a payout, usually tax-free. The payout can be used to cover living expenses, debt, a mortgage, or anything else the beneficiaries choose.

When you apply for a term life insurance policy, you will choose a coverage term of 10, 15, 20, or 30 years in addition to choosing your coverage amount. During that term, you will pay premium payments to maintain your coverage. Let’s take 25-year-old Mary as an example.

  • Example A: Mary gets a $400,000, 20-year term policy and pays around $25 per month. Her beneficiary would receive the full $400,000 in the event of her passing during that 20-year term.
  • Example B: In this scenario, let’s say Mary lives through the end of her 20-year term and is now 45 years old. At this time, she can choose to renew her existing policy or she can apply for a new policy if she wishes to continue having coverage to protect her loved ones.

Mind you, these examples are hypothetical. The cost associated with term life insurance coverage depends on many factors including your age, smoker status, coverage amount, and general health, to name a few.

If you can’t afford to buy as much coverage as you’d like right now, you can always buy more later. Even a small policy can make a huge difference in your loved one’s lives in the event of your passing. Any life insurance coverage at all can be a great benefit to your loved ones.

Who Should Consider Term Life Insurance?

Term life insurance isn’t a one-size-fits-all solution for everyone’s life insurance needs, but it’s a great option for many. Here are some types of people that might benefit from a term life insurance policy.

Term life insurance is great for:

  • People who want the least expensive life insurance option.
  • People who want to protect their family from a loss of income and help them pay off debts, fund college tuition, and retire early.
  • Young people who need to replace income in the event of their untimely death, but don’t have a ton of extra money to spend.
  • People who only need life insurance for a certain amount of time, such as during the time when kids are living at home or until their house is paid off.

How Much Coverage Do I Need?

How much coverage you need depends on your specific circumstances. When calculating your coverage you need to consider a variety of components:

  • Your current income and income goals
  • How much debt you have
  • Your current health
  • Any risky habits or hobbies you have
  • Whether you rent or own a home
  • How many kids you have
  • Your spouse or partner’s financial needs
  • Whether you’ll want to add riders to your policy

The average rule of thumb is to obtain enough life insurance coverage to equal 10x your income, but that can vary depending on the individual. You want to weigh all of these factors carefully when determining your needs.

Adding Your Beneficiary

In most cases, the policy beneficiary (recipient of the payout) is someone you have a close relationship with, like your spouse, parents, children, or business partner.

If you would like to name your minor children as beneficiaries, or if you wish to provide funds to a non-profit organization upon your passing, you might want to consider naming a trust as your beneficiary. The trust will provide the trustee all of the details related to how your death benefit proceeds should be distributed. To learn more about trusts, you can ask someone who specializes in estate planning for guidance.

How Do Life Insurance Payouts Work?

When an insured person dies, it’s the responsibility of the beneficiary named on the life insurance policy to file a death claim with the life insurance company in order to receive the death benefit. After receiving the death certificate, the beneficiary should contact the insurance company to begin the claims process. The company will provide the beneficiary with the necessary forms and assistance to complete this step.

The beneficiary may need immediate cash, especially if the person who died was a primary wage earner with dependents. For this reason, most death claims are paid as quickly as possible, usually within a couple weeks. The insurance companies know how important the benefit is to the survivors, so they do everything they can to expedite the process. If there are extenuating circumstances, the claims process may take longer to complete. Interest will be paid on death benefit proceeds in accordance with the requirements of the state where the policy was issued. Check out our in-depth look at the life insurance claims process to learn more.

In some cases, instead of a lump sum payment, beneficiaries can choose to take payments spread out over time instead. This is called a Settlement Option. If a settlement option is preferred over the lump sum payment, the life insurance company will typically set up an annuity with the death benefit proceeds. From there, and according to the terms of the settlement option selected, the beneficiary will receive annuity payments. Depending on the type of annuity and payment options selected, the beneficiary can receive payments for a specific amount, for a specific period of time, or other options made available by the company.

Taxes And Life Insurance

The premiums you pay for life insurance aren’t usually tax deductible, but the payout is generally tax-free to your named beneficiaries.

Beneficiaries don’t typically have to claim life insurance payouts as gross income on their taxes. If they choose to take settlement option payments from the life insurance company over time, they may have to pay taxes on the interest that accumulates in the account.

When making decisions about which type of life insurance to buy, how much to buy, how to handle a payout, paying taxes on life insurance money, or how to manage an estate, it’s a good idea to seek the advice of a tax professional and financial advisor.

How To Get Term Life Insurance With Ethos

When it comes to getting a term life insurance policy, Ethos makes the process easy. Just follow a few simple steps.

  • Step 1: Get a quote

    • It only takes a few seconds to do this on our site. You’ll need to provide information like your gender, age, location, general health, and use of nicotine products for an accurate quote. Note that for some of our policies, the quoted price will be given after the application is completed.
  • Step 2: Select your term & coverage amount

    • You decide the duration of your term policy. Be sure to consider your current and long-term needs when choosing a coverage amount and term length.
  • Step 3: Apply online

    • This is where you’ll submit more personal information like your name, address, and details on your medical history. You’ll also name your beneficiaries (the people you’d like the death benefit funds to go to).
  • Step 4: Approval processing & policy activation

    • After submitting your application, it will either be automatically approved or sent to underwriting. It’s also possible that you may need to provide additional information for processing. This means you may need to verify some of the information you provided. Some companies require a medical exam during this stage, but in most cases, Ethos does not require one. We also use Docusign to efficiently send forms and collect signatures so you can receive coverage as soon as possible.

      After our underwriter approves your application, you’ll have the option to accept the policy. Upon acceptance and premium payment, your coverage begins.

Take The First Step

Getting life insurance doesn’t have to be confusing or a hassle. With Ethos’ simple online application the process can actually be clear and concise. Term insurance is an affordable means to protect your family’s financial future in the event of an unexpected passing. Ultimately, you’ll have more peace of mind knowing your loved ones are taken care of—no matter what. Take the first step to getting covered by getting a quote today.

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