Term life insurance is fairly simple to understand, while permanent life insurance requires a bit more study. Life insurance is an important part of financial planning for individuals, especially as they grow older and have a family, mortgages, car loans, educational loans and other types of expenses to cover in the event of their untimely death. When making a decision about whether to buy a term life insurance policy understanding a few details about term life policies will make an informed decision that much easier.
What is Term Life Insurance?
Term life is the original and most basic form of life insurance. It is used to give individuals adequate life insurance protection while keeping costs low. Policies are purchased for a set number of years, such as 10, 20 or 30. If the policy holder dies while the policy is in force, the policy’s face value is paid out in a lump sum to the beneficiary.
One of the reasons term insurance is so much less expensive than other permanent life insurance policies is that term insurance may expire and never payout, while permanent insurance always eventually pays out. According to one study, approximately 1 percent of term insurance policies actually pay out. Additionally, unlike other types of life insurance, no extra cash value builds up in a term life policy.
When is Term Life Insurance Necessary?
The primary reason people purchase term life insurance is to ensure their financial responsibilities are met. Ideally, by the time the life insurance term has expired, the policy holder will have built up enough other savings to cover his debts and protect his beneficiaries. Once the savings goal is met, term life insurance becomes no longer necessary.
In other words, the best use of term life insurance is to gain coverage for a temporary period of time. Not being able to afford the premiums on a permanent life insurance policy is another reason to buy it. It is an appropriate purchase to cover expenses that will get paid off by a certain date, such as loans or children’s college expenses. It can provide income for a spouse until retirement as well, if the insured’s death should occur before then.
Length of Term
The term of this of insurance is usually 10, 20 or 30 years. One variation of this, called an annual renewable term (ART), has a one-year term, although the policy has a guaranteed renewal each year for a set period of 10 to 30 years, usually without providing proof of good health.
As the policyholder ages, there is a greater chance they will need to provide proof that they are insurable. If a person’s health starts to decline, she may have her term insurance renewal denied when the original term expires.
How much are Term Life Premiums
Most term insurance is level term, meaning the premium will stay the same the whole time the policy is in force. Once the term expires, the policy holder usually has an option to extend the term. However, the premiums will increase as the policyholder ages. The exception is an ART policy, where the premium goes up each year. The trade-off is that an ART policy may get renewed up to age 95. The premium escalations may become expensive for middle-aged and older consumers, and they might want to shop around especially if in good health.
Renewable policies allow consumers to continue their term insurance as long as they pay premiums, regardless of their health. However, the renewal rate will increase significantly if they cannot pass a physical exam.
People looking to buy their first life insurance coverage in their 60’s may need to go with a more expensive whole life policy, as many companies will not sell term insurance to individuals older than about 65 years. Some companies, such as State Farm, offer term life insurance up to age 85 or 95, however, premiums will most likely be higher at renewal.
Common Types of Term Insurance
Term life only provides a death benefit to beneficiaries in the form of a check at the face value of the policy if the policyholder dies. There is no savings feature, which makes these policies budget-friendly and uncomplicated. Shopping to compare rates is relatively simple for term life insurance for this reason; however, understanding some terminology helps, before obtaining quotes:
- Level Term: provides a fixed coverage amount with level premiums throughout the policy term.
- Decreasing/Increasing Term: the premium stays level but the coverage amount (the amount the policy pays out in case the insured dies) can either decrease or increase through the life of a policy depending upon the contract terms.
- Renewable Term: allows the policyholder to renew her coverage when the term ends without needing to provide medical or other proof of her insurability.
- Convertible Term: a policyholder can change his term life policy into a permanent life insurance policy, depending on contract terms.
Some term life insurance policies have a conversion, or convertible term feature. This allows policyholders to exchange the term life policy for a permanent, or cash value policy, without answering any health questions or having to take a medical exam. If a policyholder’s health declines and it becomes difficult for him to qualify for term insurance, it might make sense to convert. Some insurance companies may place an age limit on conversion, such as 75 years old.
Shopping for Term Life Insurance
If the insurance seems complicated or the last thing you want to do is research life insurance, it may be best to work with a financial planner to get every question answered before making a final life insurance purchase. However, many insurers sell term life insurance, and an Internet search will easily turn up several companies. In general, it is easy to get many quotes online and avoid dealing with any pushy salespeople while finding the best rates for high-quality term insurance.