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Term life insurance provides an affordable alternative to permanent life insurance. Our guide will help you decide whether a term policy is right for you.
Home Media
Term life insurance is one of the two main types of life insurance. This policy guarantees coverage for a specific period, known as the term. If the insured person passes away during that period, the insurance company will pay out a predetermined amount of money to the beneficiaries named in the policy.
As you research and shop for life insurance, you must decide between term and permanent life insurance. Understanding the ins and outs of term life insurance will help you make an informed decision. To help you out, we at the Home Media reviews team created this guide to term life insurance, including how it works, how much it costs, and how it compares to whole life insurance.
Like all types of insurance, term life insurance is a legally binding agreement between an insurance company and a policyholder. It has two main components: the premiums and the death benefit.
The premiums are what the policyholder pays to the insurance company. Most people choose to make monthly premium payments. However, you may qualify for a discount if you can afford to pay a lump sum for a full year of coverage. If you fall behind on paying the premiums, your policy may lapse.
The insurance company agrees to pay the death benefit when the insured person dies. It is the face value of the policy. The death benefit will be delivered to whomever you name as the beneficiary or beneficiaries of the policy. Typically, the beneficiary is a family member, such as a spouse or child. However, it can also be a business partner, a friend, a trust, or a charity.
The insured person is usually — but not always — the policyholder. It is possible to take out a policy on another person. In that case, you would be the policyholder but not the insured. You might also be the beneficiary. To do this, you must have a relationship with the insured and obtain that person’s consent. For instance, you may be able to take out an insurance policy on your spouse, child, or business partner with that person’s permission.
Term life insurance coverage lasts until the end of the term period. Once it expires, you may have the option to renew your policy or convert it into whole life insurance. If not, you will have to purchase a new policy for continued coverage.
The two main types of life insurance are permanent and term life insurance. Although whole life insurance is not the only type of permanent policy available, it is the most common. As a result, people sometimes use these terms interchangeably.
Many people’s choice of life insurance will come down to term versus whole life.
As the name suggests, whole life insurance covers you for your entire life. It costs more than term life insurance and does not expire. A whole life policy will lapse if you fail to pay the premiums.
Additionally, whole life insurance policies offer cash values. When you make a premium payment, not all money goes toward policy fees and insurance costs. Some of it goes toward building the cash value of the policy. Once the cash value reaches a certain amount, you can withdraw or borrow against it. Alternatively, you can use it to cover your premiums.
After your death, the cash value will revert to the insurance company. Any withdrawals or outstanding loans against the cash value can reduce the death benefit paid to your loved ones.
Unlike whole life insurance, a term policy has a limited duration. Typically, the term is defined as a certain number of years. For instance, you might purchase a 30-year term life insurance policy. In some cases, the term might be tied to something else. Credit and mortgage life insurance, for example, last until you have paid the loan in full.
Additionally, term life insurance does not have a cash value and therefore doesn’t offer any benefits while you are alive.
Because the coverage offered by term life insurance is more limited, it tends to cost less than a whole life policy. A term policy may be the right choice if you have a limited budget. You can keep your future options open by selecting a convertible or renewable term life insurance policy.
All term life insurance policies have a limited duration. However, some policies are more flexible than others. Below are the main types of term policies you may come across.
With level term life insurance, the death benefit remains the same for the entire life of the policy. Common terms include five, 10, 15, 20, 25, and 30 years. Alternatively, a policy might last until the insured reaches a certain age, such as 65. The premiums will also remain constant throughout the term. Every policy aspect will be the same in its final year as in its first year.
With a decreasing term policy, the death benefit will decrease incrementally each year. Although your premiums will stay the same, the death benefit will be significantly lower in the final year than in the first year. This can be an economical choice if your main purpose is to cover a business loan or a mortgage since the balance of those loans will also decrease over time. Decreasing term policies cost less than their level-term counterparts.
With renewable term life insurance, you have the option to renew your policy when the term expires. This spares you the hassle of reapplying, which could mean undergoing a new medical exam. However, your renewed policy will likely feature higher premiums and a shorter term — often as short as a single year. A renewable term policy makes the most sense as a temporary measure until your health and income enable you to purchase a better policy.
With convertible term life insurance, you can convert your policy from term to whole life insurance in the future. Typically, you can choose when to make this change, though some restrictions may apply. When you convert the policy, your new premiums will be based on your current age but your past health. Rather than requiring a new medical exam, the life insurance company will use the health information provided when you originally enrolled.
Traditionally, policyholders who outlive the term of their life insurance policy do not receive any refund. However, some insurance companies now offer return of premium (ROP) insurance, albeit at higher rates than regular term policies. With an ROP policy, the insurance company will refund some or all of your premium payments if you are alive at the end of the policy term. As a result, ROP insurance can serve as both life insurance and a type of savings account.
The group and supplemental life insurance provided by or purchased through your employer is most often a form of term life insurance. Rather than offering coverage for a certain number of years, these policies only last until you either leave or lose your current job. As a result, you may not want to rely on them as your sole source of coverage.
Typically, your employer will cover the premium for your group life insurance policy. You can pay for supplemental life insurance yourself if you want more coverage. These policies tend to cost less than other life insurance options, but the death benefit may not be enough to cover your whole life insurance needs.
Mortgage life insurance and credit life insurance have a more targeted purpose than other policies. Rather than lasting a specific number of years, they remain in effect until the loan is paid off. As the loan balance decreases, so do the death benefit. In this way, they resemble decreasing term policies.
These policies do not require a medical exam, and you can wrap the premiums into your loan payments. Although they are meant to protect your spouse, business partner, or another cosigner or joint owner from having to cover the debt on their own, the lender is the beneficiary. The payout will equal the remaining loan balance and go directly to the lender.
When shopping for term life insurance, you need to consider two things: how much coverage you need and how long you need coverage.
Start by choosing a term that will cover your loved ones during the years when your death would leave them most vulnerable. For instance, if you have young children, your spouse might struggle with childcare expenses if you died. You would likely want coverage to last until your children are grown and financially independent to alleviate the burden on your surviving spouse.
If you are the primary breadwinner, you may be most concerned with how your spouse will pay the mortgage or keep up with bills for the first few years after your death. In that case, you would want your life insurance to last at least as long as your mortgage term.
Next, decide how much coverage you need. To do this, add everything you would like the death benefit to cover. This might include any outstanding debts, college tuition for your children, funeral expenses, and other financial obligations. You should also factor in the income your family will need to replace or the services they may need to pay for, such as childcare or house cleaning.
The cost of term life insurance will vary depending on the term and the coverage amount. For instance, a one-year policy with a $250,000 death benefit will cost less than a 10-year policy worth $500,000. If you are working with a tight budget, you can adjust the term and coverage amount to maximize your investment.
Your age will also have a significant impact on your life insurance costs. As you age, you become riskier to insure. Therefore, the younger you are, the lower your premiums will be. Even if you do not think you need life insurance yet, you can take advantage of your current age and health to lock in a better rate than you would qualify for later.
Insurance companies may also consider the following factors:
How To Buy Term Life Insurance
Follow these steps to buy term life insurance:
Term life insurance can be an affordable way to ease your family’s financial burdens after your death. The money can be used to pay off debt, replace your income, pay for college, and more. You can even purchase a term policy to specifically cover your mortgage or another large loan.
If price is the only thing holding you back from choosing permanent coverage, consider investing in a convertible term policy. That way, you can make the switch without applying for a brand-new policy.
