Life insurance offers significant financial protection to relatives in the event of the death of the policyholder. Term life insurance is a simple form of insurance protection that stays in place for a specified period of time. This guide will explain how term life insurance works and its benefits.
What is term life insurance?
A term life insurance policy is a type of insurance that is in effect for a limited time, such as 20 or 30 years. If the policyholder dies from a covered cause while the coverage is in force, the insurer pays a death benefit. If a policyholder remains alive, the policy ends and no benefit is paid.
Term life insurance is affordable. The premiums can be very low, especially if they are bought by young people. It offers significant protection. Surviving family members can avoid a decline in their quality of life caused by the loss of income of the deceased.
How Term Life Insurance Works
Consumers can purchase a term life insurance policy from a number of insurers. Many businesses require a medical examination, but not all. Policyholders decide how much coverage they want. This can range from a small death benefit worth a few thousand dollars to cover funeral costs to policies with a death benefit of $ 1 million or more.
Insurers price premiums based on the likelihood of the policyholder dying during the term of coverage. Premiums are often affordable, especially if the policy is underwritten by a young, healthy person. The policyholder chooses one or more beneficiaries to receive a death benefit if they die during the term. The higher the death benefit, the higher the premiums.
If the policyholder dies from a covered cause during the term of the cover, the beneficiary receives the death benefit. This money is usually paid tax-free to the beneficiaries.
Types of term life insurance
There are several types of term life insurance. Here are some of the most common types of term life insurance policies that you might come across.
Level term life insurance
Tier term life insurance is very common. With this type of policy, the premiums and death benefit remain constant throughout the life of the loan; neither of them changes. Typically, flat term policies stay in force for five to 30 years. The policyholder pays the same premiums all the time. The premiums are generally affordable. At the end of the policy term, the policy expires with no guaranteed option to renew.
Convertible term life insurance
Convertible term life insurance can be converted to whole life insurance if the policyholder wishes, so those who wish to maintain long term insurance coverage have the option of doing so. Convertible term premiums can become much more expensive if the term life insurance policy is converted to a whole life insurance policy.
Increase in term life insurance
The increase in term life insurance gives the policyholder the ability to increase the death benefit over time. Switching to higher coverage comes at an additional cost. But policyholders don’t have to worry that health issues will prevent them from buying more coverage later.
Term vs. whole life insurance
There are huge differences between term life insurance and whole life insurance in terms of cost, purpose and coverage.
Term life insurance policies are in effect for a limited time. If a policyholder does not die during the term of the contract, no death benefit is paid. Premiums are based on the cost of insurance over the term of the contract. Term life insurance is generally much more affordable than whole life coverage. However, term life insurance policies do not accumulate cash value. They cannot be cashed or sold and do not constitute an investment.
Whole life insurance policies can remain in force indefinitely. They are more expensive. But a death benefit is still payable, as long as the policy remains active. This can be ideal for someone who will always need coverage – for example, a parent with a disabled child. Whole life insurance policies can accumulate cash value. They can be used as an investment. They can be cashed out and policyholders can also borrow against the value of their policy.
Term vs. permanent life insurance
Term life insurance provides protection for a limited time. Permanent life insurance offers indefinite protection.
Whole life insurance is the most common type of permanent life insurance. Universal life insurance is another type of permanent life insurance. Universal life insurance policies also offer lifetime protection, but there is more flexibility in terms of premiums and death benefits. For example, sometimes you can use the cash value of your policy to pay the premiums and you have the option of increasing the death benefit.
How Much Term Life Insurance Do You Need?
You may want to consider purchasing enough term life insurance to support your loved ones if you die. A simple rule of thumb is to multiply the annual income by 10, so that a person earning $ 50,000 would need a death benefit of $ 500,000.
However, this may not take into account individual needs. Instead, some people prefer to perform a custom calculation using the DIME formula. It is a question of adding:
- Debt: Total unpaid invoices plus the cost of final expenses
- Returned: The number of years of income to replace
- Mortgage: The unpaid balance of a mortgage
- Education: Estimated future education costs for children
Who should buy term life insurance?
Anyone who has people who depend on them – through income or the services provided – should consider purchasing term life insurance.
For example, a stay-at-home parent would need life insurance because the work they do earns them value, but not direct income. Someone caring for aging parents would also need term life insurance, as would a family’s income provider.
How Long Do You Need Term Life Insurance?
Term life insurance should remain in effect until no one is dependent on the policyholder’s income or services.
At some point, for example, people generally retire and their loved ones would no longer suffer a direct financial blow if they died. At this point, insurance coverage is not vital.
Term life insurance rates
Term life insurance rates are determined by the risk associated with insuring an individual policyholder. The prices are calculated according to:
- The age of the policyholder
- The state of health of the policyholder
- The number of years the policy is in force
- The amount of the death benefit
Longer-term policies, policies written by the elderly or sick, and policies with high death benefits are more expensive because there is more risk for an insurer. Term life insurance premiums for a young non-smoker could be as low as $ 30 per month, while those for a 60-year-old smoker could cost more than $ 1,000 per month.
Term life insurance rate by age
Term life insurance rates increase for older policyholders who purchase coverage. For example, an insured who purchases coverage at 25 years might pay about 5% less than someone who purchases coverage at 30 years.
However, a policyholder who purchases level term life insurance does not see premiums increase once the coverage is in place. Therefore, it is generally best for consumers to protect themselves while they are young and healthy.
Term life insurance calculator
Many life insurers offer a term life insurance calculator to help policyholders determine the amount of coverage they need, as well as the costs. A term life insurance calculator can make it easier to find the right insurance protection.
Best term life insurance companies
The best term life insurance is determined by the circumstances of each individual. For example, some insurers are better suited for people with pre-existing health conditions, while others are well suited for a young and healthy person.
To find the best life insurance companies overall, shop around and get multiple quotes. Consider starting with The Ascent’s picks for top insurers, including:
- To give
- North West Mutual
- State farm
- Mutual Freedom
- Life insurance in New York
- Senior Financial
Benefits of term life insurance
Term life insurance has several advantages:
- It provides protection during the years when coverage is needed.
- It’s affordable, with premiums sometimes starting as low as $ 30 per month
- It can offer important protection to loved ones in the event of premature death
Disadvantages of Term Life Insurance
It also has a few drawbacks:
- Term life insurance policies do not stay in force indefinitely. If a policyholder does not die during the term of the contract, no death benefit is paid.
- Unlike whole life insurance policies, term life insurance policies do not have an investment component or accumulate cash value.