Term life insurance is a type of life insurance that guarantees payment of a stated death benefit if the covered person dies during a specified time. The term can be a set period, typically from five to 30 years or to a specific age, such as 65. Once the term expires, the policyholder can either renew it for another term, or convert the policy to permanent coverage, or allow the term life insurance policy to end.
Term life is traditionally less expensive than a whole life policy, but term policies have no cash value, no payout after the term expires, and no value other than a death benefit. Most term policies keep your monthly premium the same for the entire term of the policy.
How Does Term Life Insurance Work?
When you have purchased term life insurance, you will first choose an insurance company to purchase your policy. Your term life policy is a contract or agreement between you and your insurance company. The insurance company assigns a premium that you agree to pay each month for the agreed-upon term that ranges from 5 to 40 years. Upon your death, the insurer has agreed to pay a specified cash benefit to your beneficiary.
Once you select the insurer, you will need to apply for coverage. The application will let the insurer assess the risk you present to their company. The insurance company may ask for a medical exam to evaluate your health and information, such as profession and lifestyle habits, such as hobbies or sports, to set your premium. Chronic illnesses, poor health, and high-risk occupations or hobbies may raise your monthly rates.
The next step is to choose how long you want your term to last. There are a few things to consider when locking down a term for life insurance.
Your mortgage is your family’s largest expense, so if you are purchasing life insurance to assist with this cost, then account for the time left on your mortgage.
Consider how long until children are on their own, and if you will help pay for college. Many children will depend on your income past 18 if they plan to attend college.
You should consider the number of years until you retire when purchasing term life insurance to help replace income during your working years.
Once you have selected your term next, you will decide how much coverage you will need. You will need to consider getting enough coverage to care for your family’s needs if you are not there to support them and how much coverage will do that.
How Much Is Term Life Insurance?
Term life insurance provides a financial safety net, and you might pay premiums on your plan for decades. That’s why it is necessary to understand the cost of your policy.
Letting a policy lapse because you can’t afford it defeats the purpose of having it.
Premiums are determined by details such as the type of policy and the coverage amount, as well as your health, age, family background, and career.
When shopping prices on term life insurance, it is important to remember the variables that affect the premium so you can plan the ideal time to purchase your policy.
- Five factors determine the cost of term life insurance: age, gender, policy type (term vs. whole), health, and hobbies.
- It’s best to get coverage sooner rather than later because rates increase as you age and as your health declines.
- The longer and larger your policy or the riskier your health and hobbies, the higher your premiums will be.
Types of Term Life Insurance
There are four primary term life insurance policies available that include level term, yearly renewable term, return of premium, and decreasing term policies.
- Level term policies cover policyholders for a set period and hold the death benefit and premium at a constant level. As it gets increasingly expensive to cover a policyholder as they age, level term policies initially charge higher premiums to cover costs down the road.
- Yearly renewable term policies do not start with a specified term limit and renew yearly. The premiums start cheaper but increase with health decline and as the policyholder ages.
- Return of premium policies charge the policyholder a fixed premium for the policy’s life and operate under a specific term period, as other term policies do. Insurance providers offer the return of a premium option that refunds holders their premium payments at the end of the policy. This option makes premium payments during the life of the policy considerably more expensive.
- Decreasing term policies allow the death benefit to decrease in increments each year. People with children close to adulthood or college graduation may choose this option since their children are close to financial independence and will not rely on their income.
Term vs Permanent Insurance
Term life insurance has no cash value and is simple: It covers you for a fixed period, such as 10 or 20 years, and pays out if you die during the term. With a guaranteed death benefit, but no cash value, its premiums will either stay level or increase at predetermined intervals, such as after one, five, ten, or 20 years. Term life insurance is a brilliant choice when your protection needs may be high for a period, then drop back, such as when your children reach adulthood.
Meanwhile, permanent insurance has a cash value and provides lifelong insurance protection as long as your premiums are paid. Cash value builds at a fixed rate determined by the insurer. It will reach the size of the death benefit when the policy matures. You can use the cash amount in the future and for any purpose you wish, such as buying a home or a boat. The carrier can not cancel your policy once they have approved you for the coverage. Regardless of your health, the insurance will remain in force.
How Much Term Life Insurance Do You Need?
There are multiple ways to determine how much term life insurance will best suit your family. It is wise to consider financial obligations such as mortgages, college, and personal loans and then subtract whatever assets you have.
Step One – Add up your financial obligations
- Annual salary multiplied by the number of years you want to replace that income.
- How much is left on your mortgage
- Misc debts, (credit card, personal loans, health care debt, auto loans)
- Future needs such as children’s college education costs and final expenses such as funeral costs.
Step Two – Subtract from the total above any liquid assets.
- savings accounts, existing college funds, and paid-off properties or real estate.
The number you end up with is what you should buy in life insurance.
Remember, the amount of coverage affects your premium, so make sure that you have enough coverage to provide for your family’s needs and supplement your income. It is important to make sure you do not over-inflate your family’s needs so that premiums become unaffordable. If coverage lapses because of nonpayment, this does not help your family at all.
How To Buy Term Life Insurance
When buying and researching term life insurance, there are multiple ways to start and complete the process. You can purchase your policy directly from an insurance company, through an agent, or online.
Buying directly from an insurance company gives you many options. Some of these companies also carry other types of insurance, such as auto and homeowner’s insurance. Many of these companies offer multi-policy discounts if you combine life insurance with your auto or home insurance.
It is important to research the company to check for financial stability and strength. This information can be found on A.M. Best’s Consumer Insurance Center, or similar tools from Moody’s or Standard & Poor’s.
FAQ
Do you get your money back at the end of a term life insurance?
No, unless you have a return on the premium policy. These policies can be 2-4 times more expensive than regular level term life insurance.
Can I cash out a term life insurance policy?
No, term life policies have no cash value. If you want a policy that provides a death benefit and builds cash value over time, research a whole life insurance policy.
What happens to term life insurance if you don’t die?
If you outlive your term life insurance policy, you either have to buy another policy at a higher cost or go without life insurance. If your policy has a guaranteed renewal clause, you can renew at the end of your term on a year-by-year basis, but at a higher rate. This option can be expensive but can benefit your family if you have a chronic disease and poor health or are uninsurable with anyone else.
Summary
Term Life Insurance is an important financial decision that can ensure security for your family if there is a death that results in loss of income. This article reviews term life insurance policies, how your premiums are calculated, and the differences in policies available.
