What is Term Life Insurance?
There are many financial products on the market that can help increase protection for your family in the event of your death, but one in particular targets high-payout, short-term needs.
Term life insurance is a way to help a family to maintain its standard of living if a family member passes away unexpectedly. It pays out a lump sum upon the policyholder’s death, which may be used to cover expenses like mortgage payments, school tuition and the cost of daily necessities. For this reason, term life insurance is a good choice for young parents to help provide a solution for their children until they can earn a living of their own, should one or both parents pass away.
It can also be used by people who are caring for an elderly or disabled relative and wish to make provisions for them in the event of the caretaker’s unexpected death.
- Term life insurance pays a lump sum to your dependents upon your death, which may be used to cover various expenses.
- Term life insurance is affordable, but several risk factors (age, sex, weight, etc.) impact rates.
- Term life insurance is effective for a set period of time, hence the word, “term.” The term is negotiable, but usually lasts 10-30 years or until age 65.
- Term life insurance has several types: level term, term to age 70, guaranteed issue, annual renewable term, decreasing term, and return of premium.
Do I need life insurance?
If there are people in your life who depend on your earnings, and you don’t have an enormous bank account to leave behind, the answer is likely yes.
What is the cost?
Term life insurance is surprisingly affordable – especially for young people who are healthy. Risk factors such as age, sex, weight, smoking, and known diseases impact rates. Insurers often require a medical exam before qualifying you for coverage. But even people with less-than-optimal health can qualify.
Some employers even offer term life through an employee benefits group plan, meaning you are guaranteed to get coverage and you may receive preferential rates and terms. It is a good idea to talk about any employer-provided benefits with your insurance agent so your financial investments can complement each other, rather than overlap.
How much life insurance do I need?
That largely depends on your lifestyle. Here are a few questions to consider:
Do you have a 30-year-mortgage or a 10-year?
Do you have five children under 10 or just one teen?
Do you owe on cars or a student loan?
Do any of your dependents have costly medical needs?
All of these factor into your policy's structure.
Try our insurance calculator to get a better understanding of how much you may need.
Timing and Structure of Your Life Insurance Policy
Term life insurance is effective for a set period – usually 10 - 30 years or until age 65, though that is negotiable and terms that extend beyond 65 are available. For example, a 30-year old might decide to buy a 30-year term life insurance policy when they buy their first home. Or a 70-year-old might decide to buy a 10-year life insurance policy to leave an inheritance for family who have taken care of them. Someone whose term life policy has expired may buy final expense insurance, also known as burial insurance or funeral insurance.
Note that a term life insurance policy can often be converted near the end of its term into a type of life insurance called whole life insurance that will cover final expenses. That is a convenient way to prevent leaving funeral expenses to family if you don’t have other life insurance in place.
Your term life policy can be structured in multiple ways, so be sure to pick the one that best suits your financial needs.
Level term – This is a popular type of policy that provides a set lump-sum payout upon your death and charges the same monthly premium for the duration of the policy. This provides you with great predictability for your monthly budget. The normal maximum length of a level-term life insurance policy is 30 years. Its duration depends on your age and other factors at the time of purchase.
Term to age 70
Term to age 70 – This type of policy charges the same premium for the first 20 years, and then that premium increases, sometimes substantially. But because your income will most likely go up as you age, a higher premium may not be such a burden in 20 years’ time.
Annual renewable term
Annual renewable term – Under this policy, you renew coverage each year. Your premium will rise annually but not usually by very much in the early years of the coverage. You should ask how cancellation works. Often there is no forfeiture cost; you just simply don’t renew the policy.
Decreasing term – Don’t let the word “decreasing” fool you into thinking your monthly premiums will go down. The rates typically stay the same, but the amount of protection decreases.
These policies are attractive to people who are trying to cover a mortgage or child care costs and whose dependents’ expenses will decrease over time. Premiums remain level over the policy period and are usually lower than with a level term policy, where the benefits never decrease.
Guaranteed issue – We mentioned a type of guaranteed-issue life insurance above when referring to employer benefits, which are considered group benefits. There is, however, another type of guaranteed-issue term life insurance, which you can purchase from a private insurer.
This type of life insurance can often be acquired without a medical exam or medical questions. It also runs at a higher price. This is because the insurer knows less about you and your health, therefore assuming more risk. The benefits of guaranteed-issue term life insurance are generally indexed so that the policy pays less if you die soon after buying the policy and pays more the longer you live.
In general, guaranteed-issue term life insurance pays out less than what a standard term life policy would offer. It is widely used as a form of final expense insurance or for people acquiring insurance in their later years.
Return of Premium
Return of premium – Some people want to use life insurance as an investment tool that has potential payouts later in life – if they live long, that is.
A return-of-premium term life insurance policy is somewhat of an outlier, but it generally returns the premiums you have paid if you are still alive at the end of your policy term. Those premiums are higher than a normal policy, and you don’t earn interest.
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How Term Life Fits Into Your Financial Portfolio
Term life insurance is one tool in an overall financial suite. It has a high payout over a short period in order to protect families from the untimely loss of an income earner or homemaker. It has gained other uses over time, including end-of-life coverage to cover funeral and other final expenses. But mostly, it is an affordable way to help provide support for your dependents until they are able to support themselves.
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