What Is Term Life Insurance?

Many insurance products are about protecting yourself against the unforeseeable. Life insurance is about protecting your loved ones when the inevitable happens. Term life insurance is one kind of life policy that can provide that kind of financial protection.

What Is a Term Life Insurance Policy?
Term life insurance is a type of life insurance policy that has a specified end date, like 20 years from the start date. The death benefit will only be paid out if the policyholder dies during the chosen term. The death benefit is the amount of money that will be paid to the beneficiary when the policyholder passes away.

The most common type of death benefit for a term policy is a level term policy, which means that the value of the death benefit stays the same for the entire time your policy is active. The benefit can also be decreasing, meaning it shrinks over time, typically in one-year increments.

Some term policies can also be converted to a permanent life insurance policy without a medical exam, like whole or universal life insurance, once the term is up. However, once converted, those permanent life policies are more expensive.

According to the National Association of Insurance Commissioners (NAIC), some term policies can also come with a return of premium feature. That means that if a death benefit isn’t paid out by the end of the term, you’ll get back all or part of the premiums you paid. However, this is a more expensive option.

Term life policies can be bought either individually or through a group life insurance plan available through an employer, civic, or religious organization.

Compare Term, Whole, and Universal Life Insurance

Unlike a term policy, whole life insurance is a type of permanent life insurance, meaning it lasts until death. If you were to buy a whole life policy at age 25, you wouldn’t have to worry about not qualifying for coverage or paying a higher premium when buying later in life. That’s especially true if you were to develop a health condition.

With a term policy, on the other hand, a diagnosis would raise your premiums, as would your age. That said, if your term policy had a conversion option, you might be able to turn it into a whole life policy. But that will cost more.

Over time, a whole life policy also builds tax-deferred cash value, which you can borrow against. And because the cash value earnings are guaranteed, it’s a reliable source of savings. That’s not something you’ll find with a term policy.

Term policies also have the benefit of offering coverage at a lower cost than you’ll typically find with permanent policies since death may be less of a risk during a limited term. That means you’d have to pay more if you wanted the same level of coverage that you might get with a term policy, especially if you’re comparing the cost to a shorter term policy.

Term Life vs. Universal Life

Like whole life, a universal life policy also falls under the permanent life insurance category. However, the cut-off for universal policies is usually around age 95 or 100. While it may not be enough for all policyholders, it still offers more longevity than you’d find with a term policy.

You can build cash value in the form of tax-deferred interest with a universal policy, which isn’t an option with term life. Tax-deferred interest means you wouldn’t have to pay taxes on those earnings until the money is taken out of the policy.

But what sets universal life policies apart is that you have the power to change your premium and coverage. If you were to experience a job loss and needed to cut back on expenses, you would be able to do that without losing your policy. Term life insurance doesn’t offer that.

That kind of flexibility comes at a cost, though, and a term policy will provide more for your money because of its short-term nature. Plus, because interest rates impact how much you pay for these policies, it can be difficult to know how much the true cost will be. You may end up paying more than you expected. That wouldn’t be the case with a term life policy.

How Much Is Term Life Insurance?

According to the Texas Department of Insurance, the cost of term life insurance depends on your age, health, and risk factors, plus the value of the death benefit and if you’ve opted for add-ons. If you have a group policy, however, the cost will be based on these factors for the group rather than yourself.

In general, the higher the death benefit, the higher your quote will be. Men also tend to pay more for life insurance than women.

However, the overall costs of term life insurance may be lower than you expect. About half of Americans believe that the cost of life insurance is three times higher than it really is, according to financial services industry researcher LIMRA.

Female Term Life Insurance Cost

Male Term Life Insurance Cost

How Much Term Life Insurance Do I Need?
Since you tend to get more for your dollar with term life insurance, it can be easier to get a higher death benefit with an affordable policy. That doesn’t mean more coverage is necessary for your circumstances, however. Ultimately, the coverage amount you need will depend on a variety of factors.

For example, you’ll want to consider:

How long you’ll need coverage
Existing debts
Cash flow
Standard of living
Your appetite for risk
Family circumstances
Existing health conditions
Overall goals of the family
Number of beneficiaries
Potential impact if the family breadwinner dies

You can take one of two approaches for this decision, notes Brock Jolly, a Virginia-based Certified Financial Planner (CFP): needs-analysis or human life value.

With needs-analysis, you’d add up your financial expenses from the start date to the year that you estimate you might die. Human life value, on the other hand, looks at the net economic contributions that the policyholder will make to their family and then subtracts taxes and consumption. That way, their family would still have a way to replace the income they provided.

Talking to a financial professional can help you figure out how much coverage makes sense for your circumstances.

Who Should Consider Term Life Insurance?
Term life insurance isn’t right for everyone. However, in the right circumstances, it can be a useful tool.

“Maybe you’ve got a mortgage that you’re trying to make sure is covered in the event of your untimely death. Or maybe it comes down to cash flow and the death benefit,” says Jolly. “If you can’t afford the premium on permanent life insurance, then I think term insurance solves the problem.”

The fact that term life insurance is temporary isn’t necessarily a bad thing. For example, if you don’t have kids, term life insurance could provide coverage while you pay off debt that’s cosigned with a parent.

On the other hand, young folks who are starting a family might be worried about potential future health issues keeping them from qualifying for permanent life insurance or making it an unaffordable expense. In this case, a whole or universal life policy might be a better option.

Term life insurance also might not make as much sense for middle-aged folks who can afford a permanent life policy and have dependents who would be financially burdened if they were to pass away. In that case, it might be harder to get affordable permanent policies 20 years later when the term policy expires.

How Do I Buy Term Life Insurance?
The process of buying term life insurance varies depending on what company or broker you use. In general, you’d start by shopping around for a term insurance policy that fits your needs. Once you’ve narrowed it down to the policy you want, you’d contact the company or insurance agent or broker to start the application process.

You’ll need to provide basic information, like your name, address, marital status, gender, and age, as well as pertinent medical history, including existing health conditions. A medical exam may be required as well. Once approved, you can sign your policy documents and start making premium payments.

What Riders Are Available with Term Life Insurance?
According to the California Department of Insurance, a rider is an add-on coverage option you can purchase to enhance your policy. Here are a few common life insurance riders:

Accelerated benefit: You can get a portion of the death benefit early if the policyholder is diagnosed with a terminal illness or is confined to a nursing home.
Accidental death benefit: This pays an additional benefit if the policyholder dies because of an accident.
Guaranteed insurability: This lets the policyholder buy additional life insurance coverage without having to provide new evidence of insurability.

How Long Does Term Life Insurance Last?
Normally, term life policies are anywhere from five to 30 years of coverage. The policy might also end if you hit a specific age, which is usually around 65-years-old. If you reach the end of your policy, you might be able to renew it, depending on your age.

For example, if you are past your 80th birthday when you want to extend your term life insurance policy, the insurer might deny you. Or, if the term you choose would go past your 80th birthday, you might also be denied coverage.

What Is Supplemental Life Insurance?
Supplemental life insurance is an additional policy that you would be able to purchase through your employer on top of group life insurance. It tends to be more expensive than the group life insurance option but acts as a sort of cushion for your coverage.

Some examples include accidental death and dismemberment insurance, which provides coverage in the event of accidental death, and burial insurance, which can help pay for funeral costs.

For those who are looking for specific coverage that isn’t offered in the group plan or enough for your needs, supplemental life insurance might be a useful resource.

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Credits: Devon Delfino

Date: April 21, 2022

Source: https://www.usnews.com/insurance/life-insurance/term-life-insurance