Term Life Insurance
How does term life insurance work?
When you buy a term life policy, you are buying a promise from an insurance company that it will pay your beneficiaries a set amount if you die during the policy’s term. In exchange, you pay a monthly premium to the company for the duration of that term.
Keep in mind these key points about term life insurance:
- Since you cannot change the amount of coverage within a term policy, if you discover that the amount isn’t sufficient, you would need to buy an additional term life policy to provide extra coverage.
- The calculations behind life insurance rates are all about life expectancy. That's why life insurance costs more as you get older.
- If you outlive your policy term, the insurance terminates and you must buy another policy if you still want to carry life insurance. However, the annual premium for another policy could be quite expensive because your older age and any health conditions will be taken into account. That’s why it’s important to choose a suitable term length early in life.
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Why buy term life insurance?
In general, life insurance is purchased to replace your income if you die, so your loved ones can pay debts and living costs. For example, if you and your spouse own a home and you were to die tomorrow, your spouse would have to pay the mortgage on his or her own. If you had the proper term life insurance policy, your spouse would receive enough money from the policy's death benefit to pay off – or at least keep up with – the mortgage. Because of its low cost, relative to other types of life insurance, term life continues to be the most popular life insurance choice.
Term life vs. whole life
Most people ask which is better: term life or whole life, but as with most things, it depends on your specific situation. First of all, whole life is just one form of permanent life insurance, so it’s necessary to review your particular set of circumstances and match it with the insurance type that matches best.
What does term life cover?
The death benefit amount you choose at the start of your policy does not have an assigned use. Typically, these funds are used to cover funeral expenses, debts, mortgage or replace lost income of the insured party; however, the death benefit can be used by beneficiaries in any way they choose.
Since there is no legal requirement for them to spend it on the items that you planned, it’s wise to choose your beneficiaries carefully. You can also choose multiple beneficiaries, allowing you to split up the money between family members the way you want. Any requirement for how the money should be spent, such as paying off the mortgage or college tuition for children, should be specified in a will.
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Types of term life insurance
There are several kinds of term life insurance:
- Level premium - For the policy’s time period, say 20 years, your premium stays the same. Many term life policies give you the option to renew your coverage at the end of the term without undergoing another medical exam, although your premiums will rise annually after the level term period – often substantially.
- Annual renewable term - This gives you coverage for one year with the option of renewing it each year for a specified duration, such as 20 years. With this policy, your rates go up every year you renew and are calculated based on the probability of your dying within the next year.
- Return of premium - If you’d like to have term life insurance protection in place to provide for beneficiaries but you’re confident you’ll outlive the policy, you could consider "return of premium” term life insurance. Under this type of policy, if no death benefit has been paid by the end of your insurance term, you receive all your premiums back. It pays to shop around for a policy like this, but on the low end you can expect to pay 50 percent more in premiums than comparable traditional term life insurance.
- Guaranteed issue or simplified issue term – Generally used if you have an illness or a troubled medical history, these policies require only a few questions and no medical exam, but you pay a much higher premium in exchange for the guaranteed coverage. That's because the insurance company takes on more risk by insuring people without knowing their medical conditions. Guaranteed issue policies often have "graded" benefits that pay only a partial benefit if you die within the first several years of the policy. A life insurance agent can search the marketplace for a guaranteed issue policy that meets your needs, but even if you have a spotty medical history, an underwritten policy like term life still could be less expensive.
- Final Expense - If you don’t like answering a lot of questions and you want a small policy just to pay for your funeral, you might consider final expense insurance. This coverage typically pays a lower benefit than conventional term life insurance. You cannot be turned down for this type of policy, but here again you’ll pay more for that convenience.
Choosing the right term life policy
Figuring out which term length you should buy (usually 10, 20 or 30 years) requires a review of your debts, financial needs, dependents' needs – and when all those responsibilities might change. When will your dependents reach financial independence? What are your major debts, such as mortgages or other loans, and when must they be paid off?
It's a good idea to review your life insurance needs carefully, both when you buy a policy and when you experience a major life change. To stay on top of your life insurance needs, you should:
- Review your circumstances. Review your situation yearly. If you already have one, read your life insurance policy to make sure it still provides appropriate coverage.
- Shop around. Life insurance quotes vary considerably among insurers, so do your homework.
- Sweat the fine print. An insurance policy is a legal document, so read it carefully and make sure that you understand it before signing anything.
- Be truthful. Answer all application questions accurately. Insurance fraud is a serious crime and companies treat it as such.
- Maintain your list of beneficiaries. Don’t wait to change them when it’s necessary. And tell your beneficiaries about the insurance – don't pay for a policy that your heirs can never claim because they don't know about the policy or the name of the insurer.
How much can I expect to pay for term life?
The price of your policy will vary depending on your age and other risk factors, but you should never assume that a policy is out of reach because of cost. Eighty percent of consumers misjudge the cost of term life insurance, according to LIMRA.
Find your health profile and desired term length in the chart below to get an idea of your annual premium cost.
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