There is no shortage of insurance products on the market today however some of these insurance products are more important or relevant than others. Term life insurance is one of those insurance products worth considering.
What is term life insurance, and why should you care? That’s exactly what we’ll be covering below.
How Does Term Life Insurance Work?
There are a few moving pieces when it comes to term life insurance. Let’s dive into some of the most commonly asked questions which will better explain exactly what is term life insurance, and how it works.
What Does Term Life Insurance Mean?
Term life insurance is an insurance product that provides coverage for a specific period of time, also known as a term. This policy pays a death benefit only if the insured individual passes away within the term window.
How Long is Term Life Insurance?
Term life insurance comes in all different forms and durations. Generally speaking, this insurance lasts between 10 and 30 years contingent on all the premiums being paid in full, and on time.
What Happens to Term Life Insurance at the End of the Term?
If the insured individual outlives their term life insurance policy, they no longer have this life insurance coverage. For instance, if you acquire a 10-year term life insurance policy at 50 years old, and die at 65 years old (15 years later), your beneficiary will not be given a death benefit.
However, when a term life insurance policy expires, the individual can renew their policy or convert it into another insurance option, such as whole life.
How Does Term Life Insurance Payout Work?
How does a term life insurance payout work? A term life insurance payout will be paid when the policyholder passes away, so long as their death occurred during the term and the policy was up to date with all payments.
If so, the beneficiary would need to file a death claim with the insurance company, which is simply a certified copy of the death certificate. The vast majority of insurance companies will pay the death benefit within 30 days.
If for whatever reason the benefit was denied, the insurance company will provide a reason, and the beneficiary has the opportunity to appeal their reasoning.
Do You Get Your Money Back at the End of a Term Life Insurance?
If you outlive your term life insurance policy, you may be wondering if you get your money back at the end of the term period. You do in fact get the money back if you outlive the policy, however, interest is not factored into that equation.
For instance, if you contributed $25,000 to the term policy over 20 years, you will get back $25,000. This money is not taxable as the insurance company is simply just returning the money you’ve given them.
Who Benefits From Term Life Insurance?
There are numerous people who benefit from term life insurance. Of which, parents with young children rank high on that list.
Whoever the policyholder decides is the beneficiary of the policy, will benefit the most from this type of insurance.
Example of Term Life Insurance
Why do parents with young children benefit so much by having a term life insurance policy? Consider the following example.
John Smith and his wife Janet Smith, have a 2 year old son. John gets incredibly ill and passes away when the child is 3 years old. Not only does the child lose their parent, an income has been taken from the home.
If John had a term life insurance policy, a death benefit could have been paid which could have absorbed some, or all, of that lost income. It’s bad enough the family had to deal with the passing of a loved one, the last thing they’ll want to be thinking of is how they’ll continue to pay the bills.
John could have purchased a 20-year term life insurance policy with a $500,000 death benefit. This policy may have cost him $40/month.
It’s a minimal expense considering the massive death benefit that gets paid if a tragedy occurs.
Things to Consider With Term Life Insurance
There are numerous variables that must be took into consideration when applying for this policy. Such variables include:
Age and Gender
Your age and gender will play an important role in calculating your monthly premium and insurance coverage. Generally speaking, the younger you are, the healthier you are and the less likely you will be exercising your term life insurance.
Signing up for this insurance in your early adult years can save you quite a bit of money. Men also tend to pay a higher premium for their insurance because they are considered a higher risk.
Personal and Family Medical History
One’s personal and family medical history will also be taken into consideration. If you currently have an illness or disease, or come from a family where early death and disease is common, you can expect to pay a higher premium.
The term life insurance application will also have many lifestyle questions. Such questions include; how often do you drink, if you smoke cigarettes or use recreational drugs, etc.
Undoubtedly, your lifestyle can increase how risky an insurance company views you, and can increase your premium.
Types of Term Life Insurance
Not all term life insurance is created equal. There are various types of term life insurance options you can choose from. These include:
Yearly Renewable Term
A yearly renewable term life insurance policy is a life insurance policy that is effective for one year. After that year, the individual can renew their policy and buy another year of coverage.
The premium increases year over year as the individual ages. One of the benefits is the policy holder can renew the insurance without needing to do a medical exam.
Decreasing term life insurance is another form of a renewable life insurance policy. However, the coverage decreases each year.
This can help reduce the expense of such insurance. Why would someone want insurance that reduces its coverage?
In theory, as you age, the risk of needing a death benefit decreases. Consider the John Smith example from above.
His widowed wife would need to replace John’s income for a longer period of time if he passes away when his children were younger.
Level-Term / Level-Premium
A level-term / level-premium term life insurance policy is a policy that provides coverage for a locked in period of time. The death benefit and the premium are fixed, meaning they do not change as the policy matures.
When compared against a yearly renewable term life insurance policy, one may notice their yearly premium is higher. That is true for your younger years, but keep in mind this premium is a flat rate for the duration of the contract, so as you age, you will not see a spike in expenses.
Advantages of Term Life Insurance
There are numerous advantages to term life insurance.
Larger Death Benefit
First and foremost, term life insurance provides a larger death benefit. This is particularly important for parents with young children or for people who others rely on financially.
The size of the benefit receivable is something to consider when picking between life insurance policies.
Can Be Transferred Into Whole Life Insurance
Term life insurance can always be transferred or converted into a whole life insurance policy. This means you can extend your coverage and make it last for your whole life.
Having that flexibility is great!
Disadvantages of Term Life Insurance
There are also disadvantages that must be taken into consideration.
Must Renew at the End of the Term
Term life insurance does come to an end. At the end of the term, if you want to have continued coverage, you must renew your policy.
Renewing your contract may come with a new medical exam. This could potentially prevent you from getting the same coverage if there was an underlying illness discovered.
Also because monthly premiums can change based on the new medical exam and other variables, there is no guarantee you will pay the same premium if your policy is renewed.
As mentioned above, the death benefit is above and beyond what a whole life policy would pay. Therefore, there is more risk for the insurance company.
For this reason, it is more challenging to qualify for term life insurance in comparison to other forms of life insurance.
Premiums can increase at the end of a term. For instance, if you selected a term life insurance policy for 10 years, and once that policy expired you wanted to purchase another term life insurance policy for the next 10 years; your premium would increase as you are now older and ‘riskier’ to insure.
No Cash Value
Unlike a whole life insurance policy, term life insurance does not build a cash value that can be used or borrowed against. This is something to consider when deciding between whole and term life insurance policies.
What Is the Difference Between Term and Whole Life Insurance?
The main difference between a whole life insurance policy and a term life insurance policy is the length of coverage. When one buys a whole life insurance policy, that insurance is with them until they die, and the policy also builds a cash value.
A term life insurance policy is just for a specific period of time and has no cash value.
Should You Consider Term Life Insurance?
Term life insurance is certainly something worth considering! However, its real use depends on your life’s circumstances.
If you are single with no dependents, term life insurance likely isn’t high on your priority list. However, if you are married or have a young family, a term life insurance policy can help protect your family in the event of a tragedy.
If you are considering purchasing life insurance it may be a good idea to turn to a financial advisor to ensure you are making a decision that is in your futures best interest.