Term life insurance is a specific type of life insurance policy that provides coverage for a set period, known as a “term.” In the event of the insured person’s death during this term while the policy is active, a death benefit is paid out.
How Term Life Insurance Works
Term insurance is commonly more affordable initially compared to permanent life insurance options like whole life or universal life plans. This affordability stems from term insurance being tailored for specific time frames and not intended for lifelong coverage, which is typically more costly. Additionally, term life insurance does not accrue cash value, unlike some permanent life insurance options.
- Term insurance provides coverage for a specified period, e.g., 30 years.
- If the insured person passes away during the term and the policy is active, a death benefit is paid.
- Most term policies feature consistent premiums for the policy’s duration.
- Many term policies include the ability to convert to permanent insurance.
Term insurance policies vary, with some offering level premiums for 10, 20, or 30 years, often termed as “level term” policies. Premiums are the fixed costs paid by policyholders, typically on a monthly basis, to receive the policy benefits.
Insurance companies determine premiums based on factors like the insured’s health, age, and life expectancy. Certain policies may entail a medical evaluation to assess the insured individual’s health and family medical history.
Premiums are typically steady throughout the term and are paid for the specified period. If the insured person passes away before the policy term ends, the insurance company disburses the death benefit to the beneficiaries. However, if the term concludes and the individual passes away thereafter, no coverage or benefit is provided.
Many term policies are convertible to permanent life insurance, like whole life or universal life, within a set timeframe following the policy initiation. Converting to permanent insurance typically leads to increased premium costs.
Example of Term Life Insurance
Term life insurance premiums vary based on factors such as age and payout amount. For a 30-year policy with a $250,000 payout, premiums may range from $15 per month for individuals in their 20s to $60 per month for those in their 50s. Premium rates are influenced by policy features, the insured’s health status, smoking history, and other relevant factors.
Types of Term Insurance
Apart from level term policies, there are various types of term insurance each with distinct advantages and disadvantages, catering to different policyholders’ needs and beneficiaries.
Convertible Term
Convertible term life insurance permits the conversion of a term policy into a permanent life insurance plan, like whole life or universal life, with lifelong coverage. A significant benefit is the absence of medical exams or considerations of health conditions during the conversion process.
Increasing Term
Certain policies allow for the increment of the death benefit over time, accompanying an increase in premiums. This flexibility enables lower initial premiums, eliminating the need for a new policy application at a later age for enhanced benefits, as seen with traditional term insurance.
Mortgage Term or Decreasing Term
Conversely, mortgage term or decreasing term insurance involves a reduction in the death benefit amount over time. The benefit decrease aligns with the policyholder’s dwindling mortgage balance, assuming less insurance is required with decreasing liabilities. While premiums are lower than level-benefit term insurance, they remain constant despite declining benefits.
Annual Renewable
Annual renewable term (ART) insurance renews annually, incrementing the premium due to the insured aging another year. While ensuring coverage approval each year, this option may become costlier over time for some individuals.
Term Life Insurance vs. Whole Life Insurance
Term life insurance is a straightforward form of coverage, offering a specific death benefit if the insured individual passes away during the policy’s active term. Unlike whole life insurance, termed as permanent coverage, term life insurance lacks cash value accumulation and caters to defined timeframes.
Term insurance typically boasts lower costs than other life insurance variants and is easier to comprehend than permanent policies. However, its coverage ceases upon the term’s expiry and lacks the wealth accumulation aspects seen with permanent policies.
Whole life insurance is notably pricier but locks in premiums for life. Additionally, whole life policies offer the option to borrow against the accrued cash value, providing financial flexibility during the insured individual’s lifetime. Nonetheless, surrendering the policy or carrying outstanding loans can have implications on the death benefit.
Advisor Insight
Steve Kobrin, LUTCFThe firm of Steven H. Kobrin, LUTCF, Fair Lawn, N.J.
Term life insurance presents distinctive features:
- Guaranteed premiums and survivor benefits for a defined period based on factors such as the insured’s age and company policies.
- Lack of cash accumulation within the policy, precluding additional benefits through extra premiums or other means.
Term life insurance suits single needs over specific periods, like mortgage or business loan coverage. However, rates may surge significantly post the guaranteed term if ongoing coverage is required.
A term life insurance policy represents a basic form of coverage, where premiums are paid over a set duration, typically 10 to 30 years. Upon the policyholder’s demise within this period, a monetary benefit is disbursed to the designated beneficiaries.
If the term ends and the policyholder is alive, no funds are returned from the term life insurance policy. It solely serves as a death benefit payable to heirs upon the insured individual’s demise. Nevertheless, there are return of premium (ROP) term life insurance options offering refunds on paid premiums. Generally, most policyholders outlive their term life policies.
The choice between term life insurance and whole life insurance hinges on the specific needs of one’s family.
Term life insurance is an affordable route to providing a lump sum to dependents in unfortunate events. It’s particularly attractive for young, healthy individuals supporting families.
Whole life insurance, albeit costlier, offers permanent coverage and the cash value that grows over time, permitting withdrawals or tax-free loans for various financial requirements, thus doubling up as an investment and insurance solution.
The Bottom Line
In essence, term life insurance provides a defined coverage for a specified period. If the insured person passes away during the term while the policy is active, a death benefit is paid out. Term policies often feature level premiums throughout the policy duration, with options for varying benefits and conversions to permanent insurance.