Term life insurance is also known as pure insurance. It guarantees payment of a death benefit to the insured if they die within a specific time period. The policyholder has the option to renew the policy for another term or convert it to permanent coverage.
- Term life insurance provides a guaranteed death benefit to the beneficiaries of the insured if the insured dies within a specific time period.
- These policies are worth nothing other than the guaranteed death benefit. They also do not have savings components like whole life insurance products.
- Term life premiums depend on the person’s health and age.
- It may be possible to convert term life into whole-life insurance depending on which insurance company you choose.
- Term life insurance policies can be purchased that last for 10, 15, or 20 year.
How Term Life Insurance Works
The premiums for term life insurance policies are determined by the insurance company based on their value (the payout amount), your age, gender and health. Sometimes, a medical exam is required. Insurance companies may ask about your driving record and current medications. They might also inquire about your occupation, hobbies, family history, and smoking status.
The insurer will pay your beneficiaries the policy’s face value if you die within the policy term. The insurer will pay the policy’s face value to your beneficiaries if you die during the policy term.
If the policy expires prior to your death, however, no payout will be made. A term policy can be renewed at expiration. However, premiums will be adjusted for your age when renewal is made.
Term life policies are worth nothing other than the guaranteed death benefit. A whole-life insurance product does not include a savings component.
Term life insurance is typically the cheapest type of life insurance because it only provides a death benefit and offers a limited benefit. A healthy 35-year old non-smoker can usually get a 20-year premium policy with a $250,000 face-value for $20-30 per month.
The premiums for purchasing whole life equivalents could be as high as $200-300 per month depending on the issuer. The overall risk to the insurer’s bottom line is lower for term life policies because they expire before the policy pays a death benefit. Insurers can pass savings on to customers by lowering premiums because of the lower risk.
Premiums can be affected by state regulations, interest rates, financials, and state regulations. Companies often offer lower rates for “breakpoint” coverage levels such as $100,000, $250,000 and $500,000 than they do at $1,000,000.
Term life insurance is the most affordable option for life insurance. This is because it offers the best coverage for the lowest premium. When you’re ready to buy, check out our recommendations for the best term life insurance policies .
Example of Term Life Insurance Policies
George, a thirty-year-old man, wants to provide protection for his family in case of his unexpected death. A $500,000 10-year-term life insurance policy is purchased by George at a monthly premium of $50. George will be paid $500,000. Upon George’s death, the policy will pay his beneficiary for the remaining 10 years. His beneficiary will not receive any benefit if he dies before the policy expires. The premiums for a renewal of the policy will be higher because they are based on his 40-year-old age instead of his 30-year old age.
George will likely not be eligible for renewal if he is diagnosed with a terminal disease during his first policy term. Although some policies offer guaranteed reinsurance (with no proof of insurability), these features tend to increase the policy’s cost.
Types of Term Life Insurance
There are many types of term insurance. The best choice will depend on your personal circumstances.
Policies for Level Term or Level-Premium
These policies provide coverage for a specific period of time, ranging between 10 and 30 years. Both the premium and death benefit are fixed. The premium is higher than the premium for yearly renewable term insurance. This is because actuaries have to account for rising insurance costs over the life of the policy.
Policies with Yearly Renewable Terms (YRT)
Annually renewable term (YRT), policies do not have a specified term, but can be renewed every year without presenting evidence of insurability. As the insured person gets older, premiums rise. The policy is not a permanent option. However, the premiums can be prohibitively high as people age. This makes it an unattractive option for many.
Decreasing Term Policy
These policies have a death benefit which decreases every year according to a predetermined timetable. For the life of the policy, the policyholder must pay a fixed premium. To match the coverage and decreasing principal of the mortgage, many policies with decreasing term are used together.
After you have selected the policy that is right for you, make sure to thoroughly research all the companies you are considering to make sure you get the best term insurance.
Benefits of Term Life Insurance
Term life insurance can be attractive for teenagers with children. For relatively low prices, parents may be able to get large amounts of coverage. The significant benefit may replace income lost due to the death of a parent.
These policies can also be used for those who have a temporary need for life insurance. The policyholder might calculate that their beneficiaries will not require additional financial protection by the time the policy ends or have enough liquid assets to self insure.
Term Life Insurance vs. Permanent Life Insurance
There are three main differences in a term and permanent life insurance policy. These include the amount of cash value and the length of the policy. These are just a few things to think about when deciding which policy is right for you.