What is Term Life Insurance?
Term life insurance provides financial protection for a set period of time, known as the “term”. It pays out a lump sum death benefit to your beneficiaries if you pass away during the term. Unlike whole life insurance, term life insurance policies do not build cash value and expire after the term ends.
Term life insurance is often used to cover temporary financial obligations like a mortgage or college tuition. It provides affordable life insurance coverage for a specific timeframe when your dependents would need financial support.
How Does Term Life Insurance Work?
With term life insurance, you choose both the death benefit amount and the length of the term. Common term lengths are 10, 15, 20, 25 and 30 years.
The death benefit amount stays the same for the entire term. Your premiums also remain level and are locked in for the length of the term.
If you die during the term, your beneficiaries receive the death benefit payout. If you outlive the term, the policy simply expires unless you choose to renew it.
Term life insurance only pays out if you die during the initial term. There is no cash value built up like with whole life insurance.
READ ALSO: Planning for the Future with Life Insurance
Types of Term Life Insurance
There are several different types of term life insurance policies:
Level Term: With a level term, the death benefit and premiums remain constant for the length of the term. This is the most common type of term life insurance.
Decreasing Term: The death benefit amount decreases over the term while premiums remain level. This can be useful to cover a debt that declines over time, like a mortgage.
Renewable Term: The policy is guaranteed to be renewable for an additional term at the end of the initial term. However, premiums increase at each renewal as you age.
Convertible Term: You have the option to convert the term policy into a permanent life insurance policy, like whole life or universal life, without a medical exam.
Benefits of Term Life Insurance
There are several advantages to choosing term life insurance:
Low Cost
Term life insurance offers the most affordable way to purchase life insurance. Premiums are significantly lower compared to permanent life insurance policies. Term life insurance rates depend on factors like age, health, and the length of the term. The younger and healthier you are, the lower your premium.
Guaranteed Death Benefit
Term policies provide a guaranteed death benefit payout to beneficiaries if you die during the term. As long as you pay your premiums, the insurance company must pay the face value of the policy.
Customizable Term Length
You can match the term length to temporary needs like covering a mortgage, funding college tuition, or replacing income until retirement. Terms are typically available for 10 to 30 years.
No Medical Exam Required
Many term life insurance policies can be purchased without a medical exam, making it easier to qualify if you have health conditions. Insurers may ask health questions on the application. No-exam policies often have lower coverage limits.
Ability to Renew
Most term policies are guaranteed to be renewable at the end of the term, up to a certain age limit. You don’t need to re-qualify medically, although premiums increase as you age.
Drawbacks of Term Life Insurance
While term life insurance offers many benefits, there are some drawbacks to consider:
Coverage Expires
The biggest downside is that term life insurance only provides temporary coverage. Once the term expires, your coverage ends unless you renew the policy or convert it to permanent life insurance.
Premiums Increase Over Time
If you renew term insurance after the initial term, premiums will be higher because they are based on your age. Premiums can eventually become prohibitively expensive.
No Cash Value
Term life insurance only pays out if you die during the term. There is no cash value, investment, or savings component as there is with permanent life insurance.
Risk of Becoming Uninsurable
If you develop a health condition that makes you uninsurable, you may lose the ability to renew your term policy or convert to permanent coverage when the term expires.
When to Choose Term Life Insurance
Here are some situations when term life insurance is a good choice:
Replacing Income Temporarily
If you have young dependents, term life insurance can provide funds to cover household expenses and replace your income until your children grow up and can support themselves.
Covering a Mortgage
You can match the length of a term life insurance policy to the number of years left on your mortgage. This ensures your family doesn’t lose their home if you pass away prematurely.
Paying for College
Term life insurance benefits can help fund future college tuition costs if you were to die while your children are young.
Filling a Coverage Gap
If you already have some permanent life insurance but need more coverage for a certain number of years, term life insurance can provide an affordable way to fill that temporary need.
Supplementing Retirement Savings
The death benefit from a term life insurance policy can help replace lost retirement savings and income if you pass away earlier than expected.
How Much Term Life Insurance Do You Need?
Determining the right amount of term life insurance requires calculating your family’s needs:
Income Replacement
A common approach is to buy enough term life insurance to replace 5-10 years of your income. This provides funds to maintain your family’s standard of living.
Cover Specific Expenses
Add up any specific costs you want to cover, like a mortgage, loans, college tuition, and final expenses. This gives you a lump sum amount for your term policy.
Consider Existing Assets
Factor in any existing assets or insurance your family could use if you pass away. This may allow you to lower the needed term life insurance amount.
Err on the High Side
It’s better to have slightly more coverage than you need than too little. An insurance agent can help calculate an appropriate term life insurance amount for your situation.
How to Get Term Life Insurance
Follow these steps when purchasing term life insurance:
Compare Quotes
Get quotes from several highly-rated insurance companies. Compare coverage amounts, term lengths, and premium costs.
Apply for Coverage
Fill out an application with your chosen insurer. You’ll answer health and lifestyle questions. Some policies require a medical exam.
Choose Policy Details
Pick the death benefit amount to cover your family’s needs. Select a term length that matches the timeframe you need coverage (such as 20 or 30 years).
Pay Premiums
Once approved, you’ll begin paying premiums to keep the policy active. Premiums remain level for the entire term period.
List Beneficiaries
Name one or more beneficiaries on the policy who will receive the death benefit if you pass away during the term. Ensure your beneficiaries are up to date.
Maintain Coverage
Make sure to pay premiums on time. Before your term expires, decide if you need to renew, convert to permanent life, or cancel the policy.
Finding the Best Term Life Insurance Rates
The cost of term life insurance depends on several factors. Follow these tips to find the most affordable rates:
Buy When You’re Young
Premiums are significantly lower when you’re young and in good health. Buying term insurance in your 20s or 30s saves substantially compared to waiting until later years.
Choose Shorter Terms
Opt for 10 or 15 year term policies rather than 20 or 30 year terms to reduce premium costs, if possible, based on your needs.
Get a No-Exam Policy
No medical exam policy can offer lower rates if you qualify based on health, age, and coverage amount.
Improve Health & Lifestyle
Losing weight, quitting smoking, and reducing health risks can potentially lower your term life insurance rates.
Compare Quotes Online
Use an online insurance marketplace to quickly compare quotes from multiple insurers. Online shopping can help find the most competitive rate.
Buy Group Insurance
Check if you can get term life insurance through an employer, association, or other group. This can sometimes provide lower rates than buying an individual policy.
Pay Annually
Opt to pay premiums annually rather than monthly to avoid installment fees that can add to your overall costs.
Term Life Insurance Companies
Here are some top-rated life insurance companies to consider for term coverage:
Banner Life
Banner Life offers customizable term policies with strong financial ratings. Their term plans have a level death benefit with guaranteed premiums and can be converted to permanent insurance.
Haven Life
Haven Life specializes in easy online term life insurance without medical exams. They provide affordable rates by selling directly to consumers.
Ladder Life
Ladder Life innovates on traditional term life insurance. Their coverage adjusts over time to match your decreasing needs as you age.
Lincoln Financial
Lincoln Financial offers a wide range of term lengths from 10 to 30 years. Their terminal illness rider pays an early benefit if diagnosed with 12 months or less to live.
Mutual of Omaha
Mutual of Omaha offers renewable term life insurance with a level death benefit and premiums. Policies are convertible to permanent insurance.
Prudential
Prudential’s term life policies feature a chronic illness rider to accelerate the death benefit while living. Convertible to permanent coverage.
State Farm
State Farm provides affordable term life insurance that is guaranteed to be renewable through age 95. Policies can be customized for your budget.
To Recap
Term life insurance can provide financial protection for temporary needs or specific periods of time when your loved ones would need support. It offers an affordable way to purchase life insurance coverage.
While term life insurance only provides coverage for a set period of time, it is significantly less expensive than permanent forms of life insurance. Term policies can be matched to the length of needs like paying off a mortgage, funding college tuition, or replacing income.
The right amount of term life insurance depends on factors like income replacement, covering debts, and future expenses like college. Working with an insurance agent can help determine an appropriate term policy and amount for your financial situation and goals.
Term Life Insurance FAQs
Here are answers to some frequently asked questions about term life insurance:
What happens when term life insurance ends?
When the term expires, coverage ends unless you choose to renew the policy or convert it to a permanent life insurance policy. If you don’t renew or convert, the coverage terminates, and your beneficiaries will not receive a payout.
Is term life insurance expensive?
Term life insurance provides the most affordable way to buy life insurance. Premiums are based on your age and health status when you first get coverage. The younger and healthier you are, the lower the rates.
Can term insurance be renewed?
Most term life policies are guaranteed to be renewable up to a certain age, such as 80 or 90 years old. You don’t need to re-qualify when it’s time for renewal, but premiums do go up based on your attained age.
Is a medical exam required for term insurance?
Some term life policies can be purchased without a medical exam, just by answering health history questions. However, for larger amounts of coverage, most companies will require a full medical exam and possibly other screenings.
Can a term policy be converted to permanent insurance?
Many term life policies include a conversion option that allows switching to a permanent life insurance policy, like whole life or universal life, without medical underwriting. This maintains your insurability as you age.
Do term life premiums ever increase?
Premiums are locked in for the entire term period you choose (like 20 years). However, they will increase at renewal once the initial term expires, based on your age at the time of renewal.
Is a return of premium rider worth it on term life?
A return of premium rider allows you to get your premiums back if you outlive the term. This rider adds cost to the policy. For most buyers, the extra cost outweighs the potential benefit.
Can you borrow against a term life insurance policy?
Unlike permanent life insurance, term life policies do not build cash value that you can borrow against. Since term insurance only provides a death benefit, you cannot borrow or withdraw funds from a term policy.
Is employer group term life insurance a good deal?
Group term life insurance through your employer is typically cheaper than buying an individual policy. The downside is that coverage usually ends if you leave your job. It may also not be customizable to your needs.
In another related article, Understanding Life Insurance Costs
