Term life insurance is one of the simplest life insurance policies. It is typically less expensive in comparison to permanent whole-life insurance policies. For this type of insurance, you need to pay a premium for a certain amount of years and if you die during that time, your family will be paid in cash. The only real benefit from Term Life insurance is a cash payout if death happens before the policy expires. Because there is no cash value like with the permanent life insurance policies.
How Does Term Life Insurance Work?
When you buy a term life insurance policy, the premium you’ll have to pay is based on the value of the policy as well as gender, health, and age; but sometimes the insurance company may ask you to take a medical exam as well as data on your driving record, current medications that you take, smoking status, occupation, hobbies, and family history.
If death happens during the policy term, the insurer will pay the policy’s face value to the beneficiaries you chose. The cash payout benefits are usually non-taxable and can be used by your beneficiaries for your healthcare and funeral costs, and even some debts you may have left behind. However, there is no cash benefit if the death happens before the policy expires. You can renew a term policy at its expiration, but the premiums will be recalculated and based on your age at the time of renewal which often results in higher premiums.
When you are applying for a term life insurance policy you’ll need to choose the length of it. Term life insurance policy usually lasts between 10 and 30 years and typically if you choose the longer length the higher premium you’ll pay.
You also can decide how much of the death benefit you want which means that you can get the much coverage you want to protect your family financially once you are gone. You have also the right to name your beneficiaries which means you can divide the share of the cost among your loved ones. For example, can divide the benefits between your spouse and children 50:50.
Types of Term Life Insurance Policies
There are several types of term life insurance policies and which policy is the best for you is based on your individual needs because each policy provides different benefits.
Level Premium Policy
It is also called the level-term policy and it is one of the simplest life insurance policies on the market. The death benefit and premium are fixed. This means that your monthly premium stays the same as long as the policy lasts.
Yearly Renewable Term Policy
This type of policy is renewable each year and covers you for a year at a time. You can renew it each year without medical underwriting but at a higher cost. With this policy, you’ll have lower premiums at first but if its duration would be 30 years and you renew it each year your premiums would get much higher. In that case level premium policy would be a much better option.
Decreasing Term Life Policy
These policies have a death benefit that declines each year, and the main goal is to decline the term benefit and reduce the policyholder’s mortgage debt. The monthly premium you are required to pay is fixed for the whole duration of the policy.
Increasing Term Policy
With some policies, you can increase the death benefit for a certain amount of years. It will also increase your premium cost and with this policy, you can’t purchase another policy at an older age to get added benefits like with the other term life insurance policies.
Convertible Term Life Insurance Policy
This policy can be converted to a permanent whole life insurance policy before expiring. The huge benefit of this policy is that you don’t need to answer any medical exam nor you can be turned down based on pre-existing health conditions when you are ready to convert.
Who Should Purchase Term Life Insurance Policy?
Term life insurance policies are good for people who want to have this benefit and pay for lower premiums but have in mind that premiums can increase over time. This can depend on how many times you renew your term life policy. If you don’t mind that there is no cash value and that you will most likely need to answer health questions in your application this may be a good option for you.
Before purchasing a term life policy consider these things: your age, whether are you in the good health, the ages of your children, do you have existing life insurance, how will you cover your funeral expenses, are concerned about your health in the future, etc.
