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Term Life Insurance Defined
Term life insurance is a type of life insurance that is fulfilled for a specific number of years –the term, before it expires. If an enrolled individual – the policy holder – dies before the specified term is over, his/her beneficiary, who is typically an immediate family member, receives a death benefit: a tax-free lump sum of money which is used for funeral expenses, pay any unfinished loan or properties bought by the member, or to fulfill other financial obligations of the beneficiary.
Unlike other types of life insurance, term policies do not have cash value – a tax-delaying savings component. Permanent life insurance policy accumulates its cash value which can be used by the policy holder on its lifetime. This usually make life insurance policy pricier.
Term life insurance is one of the most common means to establish a financial safety net because of its simple and affordable nature. Nevertheless, individuals may look at other types of life insurances depending on their net worth, dependents they wish to enroll, and other circumstances. Choosing for the best policy that would fit to you will be easier by consulting to a life insurance adviser.
Term Life Insurance: How it Works
Term life insurance is simple – a policy holder only needs to know and understand a few things to get started.
Term
– how long the policy is in effect, is the main element of term life insurance that makes it different from other types of life insurance.
Term periods normally range from 10 to 30 years, depending on the policy holder’s choice. It may be paid on a monthly or annual premium on the duration of the time chosen to keep the policy active. Once the policy reaches its last year of coverage, premiums will no longer be paid, and the policy expires.
Premiums vary depending on the type of term life insurance you chose. These can:
- Stay the same on the entire duration of the policy
- Increase over time
- In rare cases, decrease over time
Term Life Insurance After Expiration
Life insurance is availed to protect your loved ones from any financial obligations you may still have once you are no longer around to provide for them.
Life insurance makes sense if you want to save for your retirement, pay off a mortgage, raising children whom you plan to send to college, or even save asan emergency fund. However, if you have sent your children to college or already has their own families, finished paying your mortgage, and even saved enough for retirement, why still pay for life insurance?
Term life insurance is the most affordable life insurance option because it expires and has no additional fees associated with it. Life insurance policy expiration is part of the plan – there is no need to be bothered by it.
Outliving Term Life Insurance Policy
If a policy holder outlives their term life policy, the policy expires and the policy holder will no longer be covered. In this case, you have the following options:
- Select a new term life policy – should you continue to need coverage, you may opt for a new policy- albeit at a higher cost than the original one.
- Convert your current policy into a whole life policy should you still need life insurance policy.
- Premiums paid over the policy term on a returned premium policy will be returned to you. You can learn more on return-of-premium life insurance below.
Life Insurance Death Benefit
If your life insurance is still active when you pass, a tax-free lump sum called the death benefit
will be given to your indicated beneficiaries. This may be paid out in full or over the course of their lifetime.
Life Insurance Cost
Term life insurance rates are way cheaper and at the same time offer more affordable financial safety net compared to permanent policies. Term life insurance protects your family while they are still dependent on your income. The below table is referenced from Policy Genius.
| AGE | $250,000 | $500,000 | $750,000 | $1,000,000 |
|---|---|---|---|---|
| 25 | $17.48 | $27.66 | $38.87 | $46.15 |
| 35 | $19.05 | $30.67 | $43.30 | $52.16 |
| 45 | $35.54 | $60.88 | $88.70 | $113.03 |
| 55 | $85.75 | $153.96 | $225.24 | $289.64 |
Life insurance costs are generally determined by:
- Health – The policy cost is dependent on your overall health, lifestyle, hobbies, and possibility of dying while the policy is in force. Therefore, people who are unhealthy, have a family history of hereditary conditions such as diabetes or cancer, and have a hazardous work or hobby are charged more.
- Age – In the same manner, older policy holder applicants are expected to pay more than younger ones. Life insurance costs increase at a rate of 8-10% yearly.
- Coverage Amount – If a policy applicant wishes to have higher benefit amount, the pay is higher.
- Term Length – Longer policy coverage is more expensive.
- Riders – The more provisions to change the conditions and limitations in a policy, the more expensive the policy is.
One of the main deciding factors in a life insurance policy cost is age. Therefore, it is essential to understand how term life insurance rates increase by age before finally deciding the type of coverage an individual should get and when is the most ideal time to buy one.
Term Life Insurance: Deciding How Much is Needed
The amount of coverage a term policy provides must be considered besides health and age to determine its final cost. Getting an affordable life insurance policy while you can still afford to cover their financial needs is essential. The below factors must be considered when deciding how much term life insurance is needed:
- Outstanding debt – mortgage, monthly utility bills, etc.
- Future college costs
- Dependents
- End-of-life expenses for yourself
- Financial support your family might need in an unseen future
Typically, a policy holder’s term life policy must last as long as their longest debt (generally a mortgage) and must cover all the remaining costs when you deduct your debts from your current assets.
Using our free life insurance calculator would give you a personalized recommendation based on the term length and coverage.
Term Life Insurance Pros and Cons
The table below shows the pros and cons that you may consider before deciding if term life insurance is your best option:
Term vs. Whole Life Insurance
Most people who seek insurance must decide between availing term life insurance of whole life insurance.
To further see which type of insurance is best for your needs, it is best to know the difference of whole life insurance versus term life insurance.
- A term policy only covers a set period. Alternatively, permanent life insurance policy covers your entire lifetime from the moment your policy started.
- A whole life insurance has a cash value equivalent to the amount of your chosen premium. This works as savings account which may grow or lose value over time.
Whole life insurance is around six to ten times the cost of comparable coverage with term life due to its equivalent cash value and associated fees. Therefore, whole life insurance is not usually the right choice for many people. Though it may be beneficial to those with vast financial plans, most people would greatly benefit in a simpler and more affordable term life policy.
Term Life Insurance: Best Companies
The best life insurance company for you is largely dependent on your specific situation. The carrier that offers the best price is what most people choose which is a good starting point.
Nonetheless, a company’s customer service record, ratings from J.D. Power, A.M. Best and the Better Business Bureau, and the tasks you can do online must also be counted. The table below shows the Policygenius’ review for each life insurance company.
How a company handles specific health conditions and lifestyle choices must also be considered as it can make a huge difference in the final cost of your term policy.
Life Insurance Types
Term life insurance, despite its basic and straightforward type of life insurance, still has variations so an individual could get the insurance policy that best fit their needs.
- Level term life insurance – The premiums remain for the entire life of the policy.
- Annual renewable term life insurance – the premium of this kind of life insurance normally starts lower than that of a standard term life policy and would increase each year. It is renewed on a year-by-year basis.
- Decreasing life term insurance – the benefit amount decreases each year. However, its premiums remain the same.
- Return-of-premium term life insurance – this premium allows the policy holder to get their money back at the end of the term.
- No-medical-exam term life insurance – medical exam may be skipped and still receive coverage
- Group term life insurance - typically offered through the workplace, however, it is not portable from employer to employer.
- Mortgage protection term life insurance – this is a decreasing term insurance wherein the mortgage provided is the beneficiary and the term is paralleled to your mortgage length.
Term Life Insurance: Is it Worth it?
Life insurance is worth it and must be a top priority especially to anyone who has a financially dependent family member and there is no adequate money to provide for their financial needs if you pass the next day. Since it's cheaper and simpler compared to permanent, it is easier to fit one’s present-day and long-term financial scheme.
When you apply to purchase life insurance, your request goes through underwriting, which is how the insurance company determines your eligibility and premiums. The average underwriting process takes about three to four weeks.
Permanent life insurance lasts a lifetime and includes an investment portion that can be used later in life. Because of this extra cash component, you'll pay substantially more for permanent policies than for term life policies.
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What it means to be a beneficiary
Is it possible for anyone to be your life insurance beneficiary?
Life insurance with no beneficiary
Updating your beneficiaries
Process of paying out life insurance beneficiaries
Possibility of a denied death benefit of life insurance beneficiary
Life insurance policy beneficiaries and paying taxes
To know how much life insurance will cost you, get the figures with our free, user-friendly life insurance calculator. No matter if you are still contemplating or have already decided to compare and buy the perfect life insurance for you, it is essential to figure out how much you need and how much it would cost would greatly help you ensure your choice. Utilize our free life insurance calculator and find helpful tips to calculate the cost of the policy that best fit your needs.