x
Rebecca Lake
Getty
If you’re looking for simple, inexpensive life insurance, you might be looking at term life insurance. Understanding how term life insurance works can help you decide if a 10-year policy is a right solution for your needs.
Term life insurance is a contract between a policyholder and the life insurance company. In exchange for premium payments, the insurer will pay a death benefit to your beneficiaries if you die while the coverage is in force.
A 10-year term life insurance policy guarantees that you lock in rates for 10 years, even if your health changes. If you pass away while the policy is in force, your beneficiaries can collect a death benefit.
When you choose a 10-year life insurance policy, you will select a:
The amount of coverage you purchase depends on your budget and financial goals. For instance, if your goal is to ensure that your home can be paid off if you pass away, consider purchasing enough coverage to cover your mortgage balance.
Similarly, if you want to make sure your loved ones can manage expenses after losing your income, you could choose a death benefit that matches your income for a set number of years. For instance, if your income is $100,000 a year and you want to provide income replacement for 10 years, $1 million in coverage may be suitable.
If you die, your loved ones can use the death benefit to cover any expenses, including funeral and burial costs, utility bills, groceries, education expenses, or outstanding debts, like a car loan or mortgage.
Related: How much life insurance do you need?
At the end of the 10-year life insurance term, the period for fixed premiums expires. Assuming you’ve outlived the policy, no death benefit will be paid to your beneficiaries. And you won’t be refunded any of the premiums paid.
That’s typical of how term life insurance works unless you buy return of premium insurance (ROP). With this type of policy, all of the money you paid in premiums is refunded tax-free if you outlive the term. ROP term life insurance is available from life insurance companies including Cincinnati Life, State Farm Life, and Vantis Life. Having a “return of premium” will cost substantially more than a regular term life insurance policy.
At the end of your 10-year life insurance term, you might be able to renew your policy. But expect your premiums to increase significantly and continue to do so on an annual basis. Renewal after the level-term period is generally not a good option due to the expense, unless you have severe health problems, still need coverage, and would be unable to buy a new policy.
Another option is to convert the term life to permanent life insurance. Permanent life insurance is more expensive than term life coverage, but coverage typically lasts a lifetime and can build cash value. If you don’t need permanent life insurance, it would likely be much more affordable to shop for a new term life insurance policy.
A 10-year term life policy can be a great choice for someone who needs coverage for a limited period. For instance, parents of school-aged children might buy a term life policy to ensure their child’s educational expenses are covered if they die. Or someone in their 50s may want a 10-year term policy to cover the rest of their working years before they retire.
Here are four things to consider when choosing a life insurance term.
Your age will impact the cost of life insurance and the length of term you can buy. Ten-year term life insurance can be affordable at even older ages. However, if you think you’ll need life insurance for more than 10 years, it’s better to buy a longer-term life policy from the start.
The longer your level term period the more you’ll pay. A 10-year life insurance policy will be more budget-friendly than a 20- or 30-year term policy. But it’s still best to buy a term length that matches the length of your financial obligations, rather than plan to re-shop in 10 years. When you buy a term life policy that’s shorter than your actual needs, you risk developing a medical condition that could make new life insurance unaffordable in the future.
A 10-year term life insurance policy can make sense in scenarios where you have a specific situation you want to plan for.
Say you and your partner want to start a family and one of you plans to take a break from the workforce. A 10-year term life insurance policy can ensure the caregiver has an income if the working parent dies.
Major life changes such as a job loss, career change, or divorce can have financial implications that might necessitate short-term life insurance. If your partner is going back to school, for instance, a term life insurance policy can ensure they are financially secure if you die before they return to the workforce.
The average cost for a 10-year term life insurance policy is $180 a year for $500,000 in coverage for a 30-year-old female, based on Forbes Advisor’s analysis of life insurance rates.
The amount you’ll pay for life insurance will usually depend on several factors, including your age, gender, health, and smoking status.
A 10-year life insurance policy could be worth it if you only need coverage for a short period. Consider this type of life insurance if the financial obligations you want to cover have a short duration. For example, if you want to cover a debt for the next 10 years, a 10-year term life policy might fit the bill.
