Special to USA TODAY
Published 7:43 AM EDT Mar 17, 2019
Ask someone why they’re investing for retirement, and they’ll usually give two answers: to cover post-retirement living expenses and to help provide for a spouse after they’re gone.
But what if “gone” comes far earlier than you expect? Term life insurance is a great – but often misunderstood – safety net.
Term life insurance is a policy with a fixed end date – usually 10, 20 or 30 years out, depending on when you expect the kids to be out of the house and your nest egg to be sufficient. It is meant to ensure your family can cover funeral expenses, debt and other needs after you’re deceased.
I bought a term life insurance policy after my children were born, and think it’s a smart move for most families. Those wanting lifelong coverage may find permanent life insurance more beneficial.
Yet industry observers have found many folks don’t investigate life insurance options. TermLife2Go, which seeks to help consumers navigate this complex industry, found most people assume life insurance costs three times more than it really does.
Why? Insurance companies can’t provide a quote until you answer a slew of questions about your health, habits and lifestyle. It’s the verbal equivalent of a colonoscopy. Many fear filling out reams of paperwork or taking medical exams, only to find out they can’t afford the insurance. It’s a vicious cycle.
Knowing how companies price life insurance helps you cut through that fog. TermLife2Go has a great online resource showing how insurance rates boil down to six factors: age, health, type and term, desired payout, gender and lifestyle.
Age is simple: The younger you are, the cheaper your coverage. Rates start jumping once you hit 40 and rise as you age, with availability more limited the older you get.
Health is the biggest swing factor. Nonsmokers pay less than smokers. Duh! Good family medical histories and healthy body types help, too. The more health issues you have, the more you’ll pay. Major illness in your family history can also raise costs.
The type and term of plan you want is something you can control. Term life is generally cheaper than permanent policies – less risk for the insurer. A whole life policy – good until you die, as long as you pay the premiums – costs more. These permanent policies build cash value – excess premium that accumulates within the policy. Folks say they’re like savings accounts. Some policies even offer investment options for the cash value. But added costs often make these unattractive.
My advice: You’re usually better off buying cheaper term insurance and plugging the savings into your 401(k). But it’s a personal choice.
Payout is also within your control and simple: The bigger the payout, the bigger the premium.
As for gender, ladies have it easier. Because a woman has a longer life expectancy than a man, her premium is typically lower. The gap isn’t huge, but it is noteworthy.
Finally, lifestyle, is a potpourri. It includes occupation, hobbies, how much you drive and travel (and the relative danger of countries you visit frequently). Folks with high-risk jobs like loggers and roofers pay higher premiums than office workers. So will those with risky hobbies, including motorcycle riding, wilderness backpacking, rock climbing and boating. If you spend too much time swimming with sharks – or boating in high-risk places – premiums get pricey. Couch potatoes typically pay higher rates than active and athletic folks.
Again, whether and what type of life insurance is right for you depends on you and your family’s needs. What I hope you do now is investigate.
Ken Fisher is founder and executive chairman of Fisher Investments, author of 11 books, four of which were New York Times bestsellers, and is No. 200 on the Forbes 400 list of richest Americans. Follow him on Twitter: @KennethLFisher
The views and opinions expressed in this column are the author’s and do not necessarily reflect those of USA TODAY.