Term Life Insurance

Term life insurance, also known as pure life insurance, is a type of life insurance that guarantees payment of a stated death benefit if the covered person dies during a specified term. Once the term expires, the policyholder can either renew it for another term, convert the policy to permanent coverage, or allow the term life insurance policy to terminate.

Term life insurance is often the most affordable policy available.

Breakdown of Term Life Insurance

A term life policy is exactly what the name implies: Coverage for a specific term or length of time, typically between 10 and 30 years. It is sometimes called “pure life insurance” because, unlike whole life insurance, there’s no cash value to the policy. It’s designed solely to give your beneficiaries a payout if you die during the term.

Most individual term policies have level premiums, so you pay the same amount every month. When the term expires, there’s no more coverage – you either have to go without or get a new policy, which will likely come at a higher cost: the older you are, the more expensive it is to get a policy. However, many providers will allow you to convert a term policy to permanent life insurance for part or all of the coverage period.

How does Term life insurance work?

When you buy a term life insurance policy, the insurance company determines the premiums based on the policy’s value (the payout amount) and your age, gender, and health. In some cases, a medical exam may be required. The insurance company may also inquire about your driving record, current medications, smoking status, occupation, hobbies, and family history.

If you die during the policy term, the insurer will pay the policy’s face value to your beneficiaries. This cash benefit may be used by beneficiaries to settle your healthcare and funeral costs, consumer debt, or mortgage debt, among other things. However, if the policy expires before your death, there is no payout. You may be able to renew a term policy at its expiration, but the premiums will be recalculated for your age at the time of renewal.

Term life policies have no value other than the guaranteed death benefit. There is no savings component as found in a whole life insurance product.

Term Life Insurance vs. Whole Life Insurance

Term life insurance differs from Whole life insurance in several ways but tends to best meet the needs of most people. Term life insurance only lasts for a set period of time and pays a death benefit should the policyholder die before the term has expired. Whole life insurance stays in effect as long as the policyholder pays the premium. Another critical difference involves premiums – term life insurance is generally much less expensive than whole life insurance because it does not involve building a cash value.

Example of Term Life Insurance

Thirty-year-old Alex wants to protect his family in the unlikely event of his early death. He buys a $500,000 10-year term life insurance policy with a premium of $50 per month. If Alex dies within the 10-year term, the policy will pay Alex’s beneficiary $500,000. If he dies after he turns 40, when the policy has expired, his beneficiary will receive no benefit. If he renews the policy, the premiums will be higher than his initial policy because they will be based on his age of 40 instead of age 30.

If Alex is diagnosed with a terminal illness during the first policy term, he likely will not be eligible to renew once that policy expires. Some policies do offer guaranteed re-insurability (without proof of insurability), but such features, when available, tend to make the policy cost more.

Term Life Insurance Types

There are several different types of term life insurance – Level Term policies, Yearly Renewable Term (YRT) Policies and Decreasing Term policies. The best option will depend on your individual circumstances.

Level Term Policies

These provide coverage for a specified period ranging from 10 to 30 years. Both the death benefit and premium are fixed. Because actuaries must account for the increasing costs of insurance over the life of the policy’s effectiveness, the premium is comparatively higher than yearly renewable term life insurance.

Yearly Renewable Term (YRT) Policies

Yearly renewable term (YRT) policies have no specified term but can be renewed each year without providing evidence of insurability. The premiums change from year to year; as the insured person ages, the premiums increase. Although there is no specified term, premiums can become prohibitively expensive as individuals age, making the policy an unattractive choice for many.

Decreasing Term Policies

These policies have a death benefit that declines each year, according to a predetermined schedule. The policyholder pays a fixed, level premium for the duration of the policy. Decreasing term policies are often used in concert with a mortgage to match the coverage with the declining principal of the home loan.

Benefits of Term Life Insurance

Term life insurance is attractive to young people with children. Parents may obtain large amounts of coverage for reasonably low costs. Upon the death of a parent, the significant benefit can replace lost income.

These policies are also well-suited for people who temporarily need specific amounts of life insurance. For example, the policyholder may calculate that by the time the policy expires, their survivors will no longer need extra financial protection or will have accumulated enough liquid assets to self-insure.

How much Term Life Insurance costs?

The cost of term life insurance depends on your age, health, and risk factors, plus the value of the death benefit and if you’ve opted for add-ons. If you have a group policy, however, the cost will be based on these factors for the group rather than yourself.

In general, the higher the death benefit, the higher your quote will be. Men also tend to pay more for life insurance than women. However, the overall costs of term life insurance may be lower than you expect. About half of Americans believe that the cost of life insurance is three times higher than it really is, according to financial services industry researcher LIMRA.

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