One of the tough realities of being an adult is planning for your loved ones if you’re unable to do it. In fact, 54% of Americans have some form of life insurance in place. While it’s not fun to imagine dying, most people want to know their loved ones can continue to live life the way they are now. For many term life insurance is the option they choose to provide coverage.
You might know that life insurance pays a benefit to your beneficiaries on your death but not know how term life insurance is different from other kinds of life insurance.
Read on to learn more about term life insurance, its benefits, and how it’s unique from other forms of life insurance.
What Is Term Life Insurance?
Term life insurance is one type of life insurance. It pays a benefit upon death, assuming the person dies during the term or time span of the policy. The policy is only good for a pre-established time period.
Once the policy expires there are a few things that can happen. The policy can be renewed for a new term. You should note that because you’d be much older when this happens, it’s likely there will be a rate increase. The policy could end and you would no longer have coverage.
Some term policies will also allow you to switch them to a permanent policy once they reach the end of their term. More on permanent life insurance and how it compares to term insurance shortly.
How Does Term Life Insurance Work?
When you seek term life insurance, you will fill out an application. Many insurers will want you to have a basic medical exam even for term insurance.
You’ll want to decide how much you want the policy to be worth. The value of the policy is a big contributor to the cost of the policy. Obviously, the larger the death benefit amount, the more policy premiums are likely to be.
Then the insurer will consider factors about you. This will include:
The other factor in term life insurance is how long the policy will last. Most policies have a term of 10, 20, or 30 years.
Once you seek term life insurance, the insurance company considers each of these factors: death benefits, your age and health, and how long the policy is good for to establish a premium. Over the course of the policy time, the premium gets paid to keep the policy active.
At the end of the term, if death benefits haven’t yet been paid, then the policyholder decides whether to renew or let the policy expire.
Benefits of Term Life Insurance
There are several benefits to term life insurance that make it a desirable option for many people.
The younger you are when you get the policy, the less expensive the policy is likely to be. Of course, you want to consider what age you’d be when the policy expires and whether you’d be at a point in life to go without insurance.
Another big benefit for most kinds of term insurance is that the premiums stay the same over the course of the policy. There are a few exceptions if you get a varied type of term insurance. More on this shortly.
Another possible benefit is that at some point, you could opt to convert the term policy to a permanent policy.
Term life insurance tends to be more cost-effective for larger death benefits than permanent life insurance too.
Cons of Term Life Insurance
There are a few potential negatives to consider, depending on how you look at them. Nobody can really predict how long they will live, so buying temporary coverage is a risk. You could pay for a 20-year term policy and live for 40 years more.
Even though you can re-qualify at the end of the term policy and continue it, you must still reapply and qualify again. So, if your health has changed, for example, you could be denied renewal. If you have health issues, it can be harder to get term insurance too.
One negative compared to permanent insurance is that the policy doesn’t build in value. You pay month after month and year after year and the policy remains the same.
If it becomes necessary to take out a new policy for another set term, the rates will surely be higher because of your age.
Types of Term Life Insurance
There are a few different types of term insurance to consider. The most standard type is commonly called level-premium term life. This simply means the premiums remain the same over the course of the life of the policy.
Renewable term life insurance has already been mentioned. This means you have a term policy that has built into it the option of renewing it at the end of the term. Not all term policies have this option, so if this matters to you, be sure to read the fine print.
Decreasing term life is another type of term insurance. This is as the name suggests a policy where the death benefit decreases over time. The rate will go down over time, along with the amount you’d get paid.
You might opt for a decreasing policy, for example, if you want to make sure there is a death benefit while you still have a mortgage. The benefit amount might decrease along with the balance of your mortgage.
Comparing Term Insurance With Permanent Life Insurance
While term insurance is for a set time period, permanent life or whole life remains in place as long as you are paying premiums. Because it lasts until you die, the insurer knows at some point they will have to pay death benefits. This means the policy will likely cost more than term insurance.
On the other hand, permanent insurance takes away the guessing game of how long you will need insurance coverage.
Many permanent policies also allow you to build wealth in them and also borrow from them later on too.
Considering Term Insurance for Your Needs
If you want to make sure you have life insurance coverage to protect your family, term life insurance is a good option that won’t break the bank. You get the security of knowing you’re covered and premiums remain constant over the life of the policy.
If you want to learn more about planning for your future needs with annuities and life insurance options, we can help. Contact us today to set up a time to talk about your needs.