What Is Term Life Insurance?

Term life insurance is a favored choice due to its simplicity, affordability, and straightforward purchasing process. However, before securing a policy for a decade or longer, it’s vital to grasp its details, protection benefits, and other available options. In this article, we’ll clarify these aspects for you.

Key Takeaways

  • Term life insurance provides a death benefit only if the insured dies during a specified term.
  • Unlike permanent life insurance, term policies don’t have a savings component.
  • Premium costs depend on factors like age, health, and life expectancy.
  • Terms available include 10, 15, 20 years, and beyond, and these policies can be renewed for another term.

What Is Term Life Insurance?

Term life insurance is an agreement where an insurer promises to pay beneficiaries a death benefit if the insured dies within the policy’s duration. When purchasing term life, you’ll primarily need to decide on the term length and the coverage amount.

What Is Term Life Insurance?

How Term Life Insurance Works

Various term insurance policies exist, with many offering level premiums over durations like 10, 20, or 30 years; these are commonly known as “level term” policies. Premiums, which are the regular costs charged by insurers, are determined by factors such as health, age, and life expectancy. Some policies might require a medical exam based on one’s health and family history.

How Term Life Insurance Works

Generally, premiums remain consistent throughout the term. If the insured passes away within the term, the beneficiaries receive the death benefit. There’s no payout if the insured outlives the term, but the policy can often be renewed or extended. However, renewing usually increases premiums due to the insured’s older age.

Furthermore, many term policies offer a “convertible” feature, allowing them to transition into permanent life insurance like universal or whole life within a set timeframe. Converting leads to a higher premium.

Cost of Term Life Insurance

Term life insurance is typically more affordable because it only provides a death benefit for a limited period and lacks the cash value feature found in permanent insurance. As per Insureon’s February 2023 data, a healthy 30-year-old non-smoker can secure a 30-year term policy with a $500,000 benefit for roughly $30 monthly. However, by age 50, this rate jumps to $138 monthly.

Term Life Insurance Rates
$500,000 CoverageAverage Monthly Cost, MaleAverage Monthly Cost, Female
30 years old$30$25
40 years old$52$42
50 years old$138$101
55 years old$241$180

Comparatively, a $500,000 whole life policy, a form of permanent insurance with cash value, carries heftier premiums. For instance, a healthy 30-year-old male might pay around $282 monthly. By age 50, this cost escalates to $571.

Whole Life Insurance Rates
$500,000 CoverageAverage Monthly Cost, MaleAverage Monthly Cost, Female

Source: Quotacy. The provided quotes pertain to a $500,000 permanent life insurance policy, specifically for men and women in prime health.

Most term life policies end without a death benefit payout, meaning less risk for insurers than permanent life policies. This reduced risk contributes to their lower premiums. Interest rates can also influence premiums, the insurer’s financial health, and state regulations. 

Typically, insurers offer favorable rates at “breakpoint” coverages like $100,000, $250,000, $500,000, and $1,000,000. Given the coverage amount versus its cost, term life is usually the most cost-effective insurance option. When you’re ready, see our top picks for term life policies.

Types of Term Life Insurance

Various term life options exist, and the ideal choice hinges on your personal situation. Typically, companies provide terms between 10 and 30 years, but some also offer extended durations of 35 and 40 years.

Level Term or Level-Premium Policy

Level-premium insurance offers a consistent monthly payment throughout the policy’s duration. It’s the primary type we’ve discussed in this article. These policies usually span 10 to 30 years with a set death benefit. However, due to actuaries accounting for rising insurance costs over time, level premiums tend to be higher than those for yearly renewable term life insurance.

Level Term or Level-Premium Policy

Yearly Renewable Term (YRT) Policy

Yearly renewable term (YRT) policies last for a year but can be renewed annually without proving insurability. As the insured ages, the premiums increase, often becoming quite costly over time. However, YRT can be a suitable choice for those seeking short-term coverage.

Decreasing Term Policy

These policies feature a death benefit that reduces yearly based on a set schedule, while the policyholder maintains a constant premium. Often, decreasing term policies align with mortgages, matching the insurance payout with the diminishing home loan principal.

What are Benefits of Term Life Insurance?

Term life insurance is especially appealing to young parents. It offers significant coverage at a low cost, ensuring that if something happens to the insured parent, their family has a financial safety net. As families grow, these policies remain relevant, providing essential support until children become financially independent. 

While this insurance can benefit an older spouse, starting a policy later in life means higher premiums than securing one earlier. Insurance companies typically cap the age for term life insurance, often between 80 to 90 years old. It’s crucial to consider both immediate needs and future scenarios when choosing the right plan.

What are Benefits of Term Life Insurance?

Example of Term Life Insurance

George, at 30, decides to safeguard his family’s future by purchasing a 10-year term life insurance for $500,000, costing him $50 monthly. If he unfortunately passes away within this decade, his chosen beneficiary will receive the full $500,000. 

However, if he outlives the policy and wishes to renew it at 40, he’ll face steeper premiums based on his older age. Should he be diagnosed with a terminal illness during the policy’s duration, his chances to renew might be slim, unless he’s opted for policies with guaranteed re-insurability – though they generally come at a premium.

Term Life Insurance vs. Permanent Life Insurance

Term life insurance and permanent insurance (like whole or universal life) differ in duration, cash value accumulation, and cost. Deciding between them hinges on your individual needs. Here’s what you should weigh up.

Term Life Insurance vs. Permanent Life Insurance

Cost of Premiums

Term life policies are perfect for those seeking high coverage without breaking the bank. On the other hand, whole life insurance holders pay a bit more for lesser coverage, but they enjoy lifelong peace of mind. While term life policyholders make payments for a set period, there’s no return on investment unless, unfortunately, the insured passes away before the term ends. Moreover, as they age, their premiums for term life insurance also rise. 

Availability of Coverage

If a term policy isn’t guaranteed renewable, the insurer might decline renewal if the policyholder falls seriously ill by the term’s end. In contrast, permanent insurance offers lifelong coverage, ensuring protection remains intact, provided premiums are consistently paid, no matter any health changes the insured might face.

Investment Value

Many customers lean towards permanent life insurance due to its embedded investment or savings component. A part of each premium boosts the cash value, which typically grows as long as the policy is active. Some of these policies even yield dividends, either paid out directly or reinvested into the policy. Over the years, this cash value can potentially cover policy premiums. Plus, there are enticing tax perks, like deferred tax on cash value growth and tax-free withdrawals.

However, financial experts often point out that the return on these policies might be less attractive than other investments like mutual funds or ETFs, especially after accounting for administrative fees. This notion led to the advice: “buy term and invest the difference.” Yet, permanent insurance has its merits, offering stable, tax-advantaged growth, especially beneficial during turbulent market conditions.

Term Life Insurance vs. Convertible Term Life Insurance

Convertible term life insurance comes with a special feature: a conversion rider. This allows you to switch your active or nearly-expiring term policy to a permanent one without new underwriting or proving your health. Ideally, you should be able to convert to any of the insurer’s permanent policies without limitations.

A key benefit of this rider is that it locks in your health rating from the term policy. So even if your health declines, when you convert, your rating remains the same. You have control over when and how much coverage to convert, but remember, your premium for the new policy will be based on your age at the time of conversion.

While switching does mean a significant bump in premiums (since permanent coverage costs more than term insurance), there’s a silver lining: you’re assured approval without any medical checks. Any health issues that arise during your term policy won’t spike your premiums. But, if you’re looking to add extra features, like a long-term care rider, the insurer might require some level of underwriting.

Which Is Better: Term Life Insurance or Whole Life Insurance?

Your family’s needs will guide your choice between term and whole life insurance. Term life is an affordable method to offer financial support to your dependents in the event of your demise. It’s particularly fitting if you’re young, healthy, and the primary breadwinner.

Which Is Better: Term Life Insurance or Whole Life Insurance?

On the other hand, whole life insurance, with its higher premiums, ensures lifelong coverage. As this policy matures, its value increases, granting policyholders the option to withdraw funds as needed. Therefore, besides being a safety net, it can also function as an investment avenue.

Term Life Insurance: FAQs

How much does term life insurance cost?

The Texas Department of Insurance highlights that factors like health, age, and other risk elements influence life insurance costs. The chosen death benefit amount and any add-ons can also affect the price. For group policies, the pricing is determined based on the group’s collective attributes rather than individual ones. Typically, a higher death benefit results in a higher quote, and men often pay more than women for coverage. 

However, it’s worth noting that many Americans overestimate the cost of term life insurance; research by LIMRA suggests that around half believe it’s three times pricier than its actual rate.

Who should use insurance of term life ?

Term life insurance isn’t always the perfect fit, but it can be beneficial under specific conditions. For instance, if you aim to secure your mortgage or prioritize the death benefit over costly premiums, term insurance might be your solution, as Jolly suggests. Its temporary nature can be advantageous; those without children might opt for term insurance to cover co-signed debt. 

However, young parents concerned about future health-related insurance constraints might find whole or universal life policies more fitting. Conversely, middle-aged individuals with dependents who can afford permanent coverage, may not see term insurance as ideal. They might face higher costs for permanent policies once their term insurance ends.

How do I buy term life insurance?

Acquiring a term life insurance policy can differ based on the company or broker you choose. Typically, you begin by searching for a policy that aligns with your needs. 

After pinpointing the right policy, you’d engage with an insurance agent, broker, or the company to initiate the application. This step involves sharing personal and medical details, possibly including a medical exam. Once approved, you finalize the policy and commence premium payment.

What riders are available with term life insurance?

The California Department of Insurance defines a rider as an extra coverage option to boost your policy. Here are some typical life insurance riders:

  • Accelerated Benefit: If the insured is diagnosed with a terminal illness or is admitted to a nursing home, this rider allows for an early payout from the death benefit.
  • Accidental Death Benefit: In the unfortunate event of a death due to an accident, this rider grants an added benefit.
  • Guaranteed Insurability: This ensures the policyholder can purchase more life insurance without proving insurability again.

How long does insurance of term life last?

Term life policies typically range from five to 30 years. These policies often conclude once you reach a certain age, often around 65. However, if your policy expires, you may have the option to renew, although this is subject to your age at the time.

For instance, if you’re nearing or have surpassed 80, extending your insurance’s term life might be a challenge. The insurer could decline your application, especially if the new term would extend beyond your 80th year.

Bottom Line

Term Life insurance is a life insurance variant that covers an individual for a specified duration or “term.” A death benefit is disbursed should the insured person pass away within this term while the policy is active. Often, these policies have stable premiums throughout their term. However, some fluctuate with benefits either decreasing or increasing over time, and they might also offer the flexibility to transition to permanent insurance.

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