Term Life Insurance
Term life insurance, which is also known as pure life insurance, is a type of life insurance that provides guaranteed payment of a stated death benefit in case the coverage policyholder dies during a specified term. When the term life insurance policy expires policyholders can switch to whole life insurance which is pernament, drop their policy, or renew it.
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 purchase a term life insurance policy, the insurance company is the one that decides the premium amounts. The amounts are based on the policy’s value, also known as the payout amount, and your age, gender, and health. In some cases, a medical exam may be required. The insurance company can also ask personal questions about things like your current prescriptions you may take, smoking status, driving record, etc.
If you pass away during the policy term, the insurer will give. a payout to beneficiaries you have previously chosen. 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.
Other than the death benefit, term life policies have no value. 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. To do so, he chooses to purchase a $300,000 term life policy that lasts 10 years with a premium of $30 per month. If Alex dies within the 10-year term, the policy will pay Alex’s beneficiary $300,000. In case Alex dies after he turns 40, when the policy has expired, his beneficiary will receive no benefit. If he chooses to renew, the premium amounts will cost more than his original policy because they are calculated based on his age.
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 but such things can 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. Premiums are relatively higher than term life insurance, which is renewed annually because accountants have to consider the cost of insurance during the life of the policy.
Renewable Term Policies
Annually renewable policies have no fixed term but can be renewed annually without proof of insurability. The premiums change from year to year; as the insured person ages, the premiums increase. While there is no fixed term, premiums can become very expensive as you age, making the policy an unattractive option for many.
Decreasing Term Policies
The death benefits of these policies are reduced on a set schedule each year. Decreasing term policies are frequently used in conjunction with mortgages to match coverage with the declining principal of the mortgage.
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, a 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 price of term life insurance is affected by a number of factors, including your age, overall health, risk factors, and even the size of the death benefit, regardless of whether you selected add-ons or not. Based on those factors the cost of your group policy will be determined.
In general, the higher the death benefit, the higher your quote will be. Men also tend to pay more for life insurance than women. Contrarily, term life insurance might be more affordable than you think.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.