Term Life Insurance
Reviewed By: Rob PinnerRob Pinner is the founder and CEO of Pinner Financial Services servicing all 50 states. Rob started his insurance career in 2002. Full Bio >
Checked By: Holly MitchellHolly Mitchell’s background in life insurance insurance goes back to 1985 when she worked for her father who was a New York Life agent. Holly has a marketing degree from Auburn University and has had a life insurance license since 2008. In addition to advising life insurance for customers all around the country, Holly is our website fact checker.
Have you selected a life insurance policy which leaves your family in a financially secure situation after you’ve passed away? It is arguably one of the most important decisions that you’ll ever have to make for the sake of your loved ones.
There are so many different insurance varieties and policies, too, and many people go for a straightforward option known as term life insurance.
How Does Term Life Insurance Work?
So, what is term life insurance exactly, and what are the pros and cons of choosing this kind of financial instrument?
On the most basic level, a term life insurance policy will cover you for a specific time which you have to pay for at a fixed rate. Once the term has run its course, your eligibility will cease, and you’ll need to seek additional coverage if you wish to continue.
It’s one of the simplest and most cost-effective ways for someone to purchase a significant death benefit, and that’s why it is so popular in today’s insurance industry.
Term life insurance typically serves as an income replacement for an individual, rather than as estate planning for charitable purposes. If claims are absent under the individual’s policy during the validity of the term, then no return will be paid on the premiums in that period.
The most common reasons for using term life insurance are:
- providing for a family’s loss of income
- covering short-term debts
- providing extra insurance coverage throughout the child-raising years
Typically, premiums are paid out on a monthly or annual basis.
Since term life insurance only provides coverage for a given term, the premiums tend to be lower than those of permanent life insurance.
What Types of Term Life Insurance Are There?
Depending on what kind of coverage you want, there are a few factors that differentiate the various term life insurance policies.
By understanding these factors and the different term life insurance options that exist, you can determine which policy would be the best fit for your situation.
Different Term Lengths for Term Life Insurance
Term lengths for term life insurance can vary from one year to thirty years, and it’s important to know which term length makes the most sense for you. Policies are most commonly available in increments of one year, five years, and ten years.
If the insured person passes away during the term of coverage, then their listed beneficiaries are entitled to receive funds from the policyholder’s insurance company.
There are also policies which do not hold to a specific increment, but rather the age of the policyholder. Instead of choosing a 10 or 20-year plan, they may choose one which covers them until, for example, age 60 or age 70.
The procedure is fundamentally the same in this case: the user must pay regular premiums to continue receiving coverage throughout the length of the term.
Level Term Life Insurance
Level term life insurance is the most consistent policy option. It offers the same coverage throughout the entire course of the term. Many mortgage owners consider this policy advantageous because it provides them with coverage towards their mortgage in a lump sum if they should pass during the policy’s term.
Decreasing Term Life Insurance
Decreasing term life insurance is a policy which requires the same premium payment throughout the term, but the benefits go down over time. This plan is most useful for individuals who are in the process of paying back a significant loan.
The logic is straightforward. In the event of your premature or unexpected death, at a younger age, the loan is at its highest amount. The higher term life insurance payback would provide better financial help to your family. That way, they don’t have to shoulder the weight of your loan.
Renewable Term Life Insurance
This option is a convenient element to consider when signing a term life insurance policy. Renewable policies allow you to rejoin your short-term policy’s conditions at the end of your current term.
It can be an annual occurrence or every five years, but it’s incredibly convenient when you consider that it saves you the trouble of doing the paperwork for an entirely new policy.
No Medical Exam Term Life Insurance
There’s no getting around the fact that the premium for this type of insurance is significantly higher than a policy which requires you to pass a medical exam.
Medical exams for insurance purposes are relatively short and manageable (about 30 minutes), so it’s unlikely the time saved will be worth the higher premium of a no-medical-exam policy. If you’re truly questioning your ability to pass the medical exam, however, then no medical exam insurance may be the solution.
Convertible Term Life Insurance
This type of insurance offers the flexibility of allowing you to turn your term life policy into a permanent life insurance policy. Most experts recommend going for a convertible policy, as your financial situation may gradually change over the years into one which would be better suited to a permanent policy.
A convertible policy also saves you the hassle of going through another medical review and applying for a new insurance plan.
What Determines the Cost of Premiums?
Age, gender, general health, and other factors which determine your life expectancy all go into determining the cost of your term life insurance premium. Beyond those aspects, your health habits, occupation, and family history are also considered.
The equation also factors in anything else that may be regarded as a liability to your overall well-being. The lower the risk you are as a client, the less your final premium will be.
Surprisingly, the premiums for term life insurance are among some of the lowest alternatives in the life insurance industry. It is mostly because policy owners tend to outlive their term life policies.
Therefore, the insurance company doesn’t usually have to pay out a death benefit. Compared to permanent policy owners, term life insurance policyholders can expect to pay exponentially less each month.
Is Term Life Insurance for Me?
Term life insurance is a fantastic option for people who want to get the most financial coverage for the least amount of money. It’s especially attractive for young families, who don’t have a lot to invest in life insurance upfront.
They still want the security of knowing that lost income can be replaced, should one of the parents die unexpectedly.
If you’re somebody who wants to receive substantial coverage without breaking the bank, but you’re unable to invest in the higher security provided by permanent life insurance, then term life insurance is a great option.
Term life insurance is one of the most cost-effective life insurance options on the market because it provides substantial coverage in exchange for affordable premiums.
Some term life insurance policies are extremely simple and straightforward; however, many still offer the convenience and flexibility of easy renewal, and the option to convert to a permanent policy after a time.
Consider term life insurance if you’re on a bit of a budget, but you still want to ensure that your family and loved ones are covered on your behalf.