Term life insurance gives coverage for temporary needs. It is considered to be the most straightforward form of life insurance. In a term policy, an insurance carrier promises to give coverage in exchange for a fixed rate of payments over a certain period.
This specific time-frame is known as the coverage period. It tends to last for 10-30 years. A 20-year span is the most common. Many people wonder if term insurance may be right for them. Let’s get into the basics of term life insurance, its features, and potential roles for it in a financial plan.
How Does Term Life Insurance Work?
If someone passes away, term life insurance is designed to provide their loved ones with immediate financial resources. People have a variety of options they can select for how long the coverage period lasts:
- 10 years,
- 15 years,
- 20 years,
- Or 30 years.
The insurance company promises a guaranteed death benefit for that time-frame. From that standpoint, term insurance can be seen as protection against financial effects of a premature death of a household income earner.
Most term insurance has an underwriting process requiring a medical examination. However, you may purchase term policies with no medical exam from some carriers, depending on age and the face value of the policy.
Unlike permanent insurance, term life insurance has no cash value component. You are buying life insurance strictly for the death benefit. Most term insurance also comes with guarantees of premiums remaining level. Or in simpler terms, the “price” of your term policy will remain the same. But depending on the term policy you buy, this part can vary, as we will discuss later.
After the end of the coverage period, the policyholder may renew or terminate the policy coverage. If a permanent life insurance policy might be of future interest, some term policies come with a “conversion privilege.” This means your term policy can be converted into a permanent one. But that may come with certain terms and conditions.
Understanding Term Life Insurance
Policy premiums are determined by the insurance provider on the basis of various factors, including the applicant’s age, overall health condition, family history, and life expectancy. If a policy owner dies within the policy term, then the face value of the policy is paid by the insurer.
However, there is no payout for deaths taking place after the term expires. Though some insurers allow renewal of term policies after their expiration, the premium amount of a new policy depends on the current age of the policy owner.
Types of Term Life Insurance
There are a few different types of term life insurance policies:
Level Premium or Level Term
These policies provide coverage for a specified time period that can be anywhere between 1-20 years, or even more. The health and age of the insured person determine the premium. In these policies, the insurer charges more at the initial stages of the policy compared to the mortality costs to level out the payment of premiums. Therefore, for the entire coverage duration, the premium payments are guaranteed and fixed.
Yearly Renewable Term
There are no specified terms with these policies. They are renewable each year without you having to show proof of insurability. These policies have low premiums at the beginning, but increase every year as per the attained age of the insured. YRT policies can be difficult to maintain because of the higher-cost premiums in the later years.
This type of term insurance is an annual renewable policy. The available death benefit for the insured decreases every year based on a predetermined schedule. Throughout the duration of the policy, a fixed and level premium is paid by the policy owner.
Is Term Life Insurance Good for Me?
A term life insurance policy is generally considered to be a good option for younger individuals with families. It may also be a good fit for people who anticipate their life insurance coverage requirement is temporary in nature. Some generally good purposes for term life insurance may be:
- Providing immediate financial resources for dependents in the event of a premature death
- Giving reliable income replacement for loved ones if a primary earner passes away
- Coverage for expenses or debts that may be overwhelming for survivors to carry if an income earner deceases, such as a mortgage
- Creating protection for young families as they start to build savings, accumulate assets, and improve their financial position
- Having coverage for a short period, like 10 years
As people pass through life, different milestones may include starting to work, having a family, purchasing a home, and finally retiring. As a result, people’s need for insurance evolves in terms of both kind and amount.
Term insurance makes sense for young professionals looking to replace or cover an income loss for their dependents. However, a permanent life insurance policy may become a better option as an individual starts accumulating assets and looks for lifetime coverage. It will also depend on the goals, needs, and circumstances of the potential policy owner.
Term Life Insurance or Permanent Life Insurance?
In general, people looking for a lot of coverage without hefty premiums may find more value in term life insurance. Permanent policy owners pay more in premiums for less coverage. However, they receive the benefit of lifelong coverage.
It is also important to recognize that the premiums for term insurance policies become more and more expensive as people age. As a result, carrying these policies into the later years of life can be extremely difficult. Those in good health may be able to opt for new coverage within a reasonable price.
However, people with issues such as declining health, or those traveling abroad, may be rated as higher risk or even deemed to be uninsurable. Unfortunately, this might mean that term policy owners will be stuck with their temporary coverage.
Permanent life insurance may be attractive for reasons other than lifelong coverage, too. Some people find it hard to swallow the idea of paying money towards something for potentially 10, 20 years, or 30 years, then having “nothing” in return for it. There is also the cash value component of permanent insurance and its potential uses.
A certain portion of each premium is allocated towards the growth of a cash value, or a savings component of a permanent policy. In many types of policies, the cash value is guaranteed. That may be a tool for tax-advantaged wealth building, tax-reduced retirement income, or other goals not possible with term insurance.
There is no universally applicable answer to the “term vs. perm” question. So, it’s prudent to consult with a knowledgeable financial professional about your needs and circumstances. You can learn more in our Term or Permanent Life Insurance section as well.
Summing It Up
When it comes to shopping for term life insurance, there is no one-size-fits-all solution. The best fit for any individual will depend on the person’s specific needs and priorities. If you’re ready to investigate whether term life insurance makes sense for you, financial professionals at Jennifer Lang Financial Services, can help you. Contact us today.