Imagine a world without yourself in it. Would your family need help paying the bills?
Term life insurance can help you bridge that gap for decades at a relatively low cost. If you die while the policy is in force, you’ll leave behind a lump sum of cash for whomever you choose.
Since term life insurance doesn’t last forever and has no investment component, it’s typically much cheaper than whole life insurance. Term life is a good policy to buy if you:
- Want low premiums coupled with a large payout when you die.
- Want to cover expenses that eventually end, like paying off your house or sending your kids to college.
Term life insurance, also known as pure life insurance, is a type of life insurance that guarantees payment of a stated death benefit if the covered person dies during a specified term. Once the term expires, the policyholder can either renew it for another term, convert the policy to permanent coverage, or allow the term life insurance policy to terminate.
When you buy a term life insurance policy, the insurance company determines the premiums based on the value of the policy (the payout amount) as well as your age, gender, and health. In some cases, a medical exam may be required. The insurance company may also inquire about your driving record, current medications, smoking status, occupation, hobbies, and family history.
If you die during the term of the policy, the insurer will pay the face value of the policy to your beneficiaries. This cash benefit—which is, in most cases, not taxable—may be used by beneficiaries to settle your healthcare and funeral costs, consumer debt, or mortgage debt among other things. However, if the policy expires before your death, there is no payout. You may be able to renew a term policy at its expiration, but the premiums will be recalculated for your age at the time of renewal. Term life policies have no value other than the guaranteed death benefit. There is no savings component as found in a whole life insurance product.
Because it offers a benefit for a restricted time and provides only a death benefit, term life is usually the least costly life insurance available. A healthy 35-year-old non-smoker can typically obtain a 20-year level-premium policy with a $250,000 face value for $20 to $30 per month. Purchasing a whole life equivalent would have significantly higher premiums, possibly $200 to $300 per month. Because most term life insurance policies expire before paying a death benefit, the overall risk to the insurer is lower than that of a permanent life policy. The reduced risk allows insurers to pass cost savings to the customers in the form of lowering premiums.
If no one depends on you financially and your death would not be a financial burden on your family, you may not need life insurance. But if someone you care about will need money if you die, term life insurance may be right for you.
Term life policies often last for 10, 20 or 30 years, but many insurers have terms available in 1- and 5-year increments. If you’re a breadwinner in your family, you can choose a term that matches the years your family will rely on your income, such as the remaining years you’ll have mortgage payments. If you’re a stay-at-home parent, you may want term life insurance to cover services you provide now without payment, such as child care. If you were gone, your family might need to pay someone to handle these tasks.
Your needs might change over time. If you expect that to happen, you can have more than one life insurance policy, giving you extra coverage at the stages of life when you need it most.
Ideally, by the time your coverage ends, you’ll no longer need life insurance. Your children will be grown, your mortgage will be paid off and you’ll have enough savings to be financially secure.
If you buy term life and then decide you need lifelong coverage after all, many policies will allow you to convert your term life policy to permanent insurance. Your premiums will go up, but you can stay insured without having to prove you’re still in good health. Some policies allow conversion at any time, while others permit it only in the first few years of coverage.
Types of Term Life Insurance
There are several different types of term life insurance; the best option will depend on your individual circumstances.
1. Level term, or level-premium, policies
These provide coverage for a specified period ranging from 10 to 30 years. Both the death benefit and premium are fixed. Because actuaries must account for the increasing costs of insurance over the life of the policy's effectiveness, the premium is comparatively higher than yearly renewable term life insurance.
2. Yearly renewable term (YRT) Policies
Yearly renewable term (YRT) policies have no specified term, but can be renewed each year without providing evidence of insurability. The premiums change from year to year; as the insured person ages, the premiums increase. Although there is no specified term, premiums can become prohibitively expensive as individuals age, making the policy an unattractive choice for many.
3. Decreasing term policies
These policies have a death benefit that declines each year, according to a predetermined schedule. The policyholder pays a fixed, level premium for the duration of the policy. Decreasing term policies are often used in concert with a mortgage to match the coverage with the declining principal of the home loan.
Once you've picked the policy that's right for you, remember to research the firms you're considering thoroughly to ensure you'll get the best term life insurance available.
Benefits of Term Life Insurance
Term life insurance is attractive to young people with children. Parents may obtain large amounts of coverage for reasonably low costs. Upon the death of a parent, the significant benefit can replace lost income.
These policies are also well-suited for people who temporarily need specific amounts of life insurance. For example, the policyholder may calculate that by the time the policy expires, their survivors will no longer need extra financial protection or will have accumulated enough liquid assets to self-insure.