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Term life insurance is a generally very simple type of policy. You purchase this type of plan for a set term of years (anywhere from 10 to 30 years), pay a monthly premium to your life insurance company, and your beneficiary(s) will receive a lump sum payment if you pass away during the term of the policy. Term life is great if you’re looking for a more cost-effective policy than a whole life policy. Term life tends to be cheaper because it expires after a set period of time and provides no additional benefits beyond the death benefit. In addition, term policies are typically “level premium,”. Meaning that your monthly payment will remain the same throughout the policy’s duration.
How Term Life Insurance Works
The first step to getting your term life insurance policy is the application process. Before your insurer can issue your policy, they will first assess how much of a risk you are to insure. They determine your risk through a process called underwriting. Which typically starts with a medical exam that will give them an idea of your current health. Then they will look into your overall medical history, as well as your lifestyle. Such as if you smoke, or if you have a dangerous career (like working on an oil rig) or engage in risky hobbies (such as skydiving). All of this helps give them a rough estimate of how long you might be expected to live. So, the healthier and “safer” your life is, the lower your premiums will be.
We should note that there are term life policies that do not require you to undergo medical underwriting. But these policies might have higher premiums and lower death benefit amounts.
Once you’ve gone through the underwriting process and have been accepted for a policy, you will choose your term length. In most cases, you can buy a policy for 10, 15, 20, 25, or 30 years. But you can also choose shorter or longer terms between 5 and 40 years if your insurer offers them. With that being said, it’s usually better to err on the side of getting a longer-term policy rather than a shorter one. Since it is easier to get an affordable policy when you are younger and in good health.
Once you’ve chosen your term length, you can next choose how much coverage you want. Meaning how much money your dependents will receive after you pass. You’ll want to do some math here and figure out how much money will cover their needs. You should factor in your mortgage payments, utility bills, and children’s education when you choose your coverage amount, as well as how much of your income you will need to replace. This will help ensure that the death benefit will help keep your family financially stable.
Finally, your last step is choosing your beneficiaries, or who will receive the death benefit. You don’t have to select just one beneficiary: for example, you can leave your spouse 50% of the death benefit and split the other 50% between your children. Your beneficiaries do not have to be family, though – you can name anyone you wish.
Types of Term Life Insurance
There is more than one type of term insurance that you should look into as you start your search for the right policy for you. An EZ agent can explain each in-depth to you. But we’ve laid out a guide to the various types of term life policies below. Each is different in its own way, with different pros and cons, and each will have a different price range.
Level Term
Level term life insurance is the most common, and most popular type of term life policy. In fact, when people refer to “term life insurance” they are usually talking about level term. The reason this type of policy is so popular is that the death benefit and the premiums for level term life insurance are both determined at the time the policy is purchased. So, they do not change at any point during the course of the policy’s duration. So, it’s a simple and budget-friendly type of policy.
Annual Renewable Term Life Insurance
Annual renewable life insurance will cover you for a period of one year. You can renew this type of policy on an annual basis, but the cost will increase proportionally with your age. Because it will eventually become more expensive than a level term life insurance policy, which has premiums that remain the same throughout the duration of the policy, annual renewable term insurance is best utilized for meeting short-term needs for life insurance coverage.
Increasing Term Life Insurance
An increasing term life insurance policy will provide you with a death benefit that will steadily become more valuable over the course of your coverage at predetermined intervals. For example, the amount of your benefit might go up by 5% each year. When compared to level term insurance, which guarantees that your premiums will remain the same no matter what, variable term insurance has more expensive premiums and the possibility that they will change over time.
Decreasing Term Life Insurance
The death benefit associated with a decreasing term life insurance policy decreases over the course of the policy’s coverage period. But the premium remains the same. The coverage of a decreasing term life insurance policy typically continues for the duration of a specific loan, such as a mortgage. But the benefit amount gradually decreases as the loan balance is paid down. This policy is best if you only want to make sure a specific debt will be paid for after you pass.
Return-of-Premium
Return-of-premium life insurance, also known as ROP insurance, is a form of term life insurance that will return your payments in the event that you outlive your coverage. ROP policies are significantly more expensive than other types of term life insurance. But you might find that the prospect of refunded premiums is an attractive advantage to this type of policy.
Convertible Term
As is the case with the vast majority of term life policies, convertible term life insurance comes with a rider that grants the policyholder the ability to change their coverage from temporary to permanent. As the term of your policy draws to a close, you may come to the realization that you still require life insurance in order to provide a safety net for your beneficiaries. So, this type of policy might be a good option for you if you think you might want to switch to a permanent life policy at a later date.
Pros and Cons
Life insurance is important for anyone who is interested in protecting their income and providing a safety net for their family in the event of their death. But is term life insurance the right type of coverage for you? Check out the pros and cons of going with term life over permanent life insurance.
The Pros:
- Affordability– Term life insurance is more affordable than other types of life insurance, allowing you to get the protection you need without breaking the bank. For comparison’s sake, a 35-year-old nonsmoking female who pays around $15 per month for a term life policy can expect to pay over $100 per month for the same amount of coverage should she choose to purchase a whole life policy.
- Easy to manage – There are no tax implications associated with term policies, and there are very few restrictions.
- Protection – Term life insurance protects your financial interests during the portion of your life when you are responsible for meeting significant financial commitments. Such as making mortgage payments or paying for your children’s education.
The requirements of each individual are unique. But term life insurance is a sensible choice for many people, despite the fact that it may come with certain disadvantages.
The Cons:
- They expire – If you still want insurance after the term of your policy expires, you will need to purchase a new policy, unless you have a convertible term life insurance policy.
- No savings option – The only type of death benefit offered by term policies is a guaranteed lump sum. Whole life insurance, on the other hand, comes with a cash value that accrues interest over time and is kept separate from the death benefit. This type of policy is desirable if you are looking to diversify your investment portfolio. Or if you have long-term financial obligations or coverage needs.
FAQ
How long should my term life insurance policy be?
Think about how long you will have your current financial commitments, and use that as a guide to determine how long your life insurance policy should be in effect. You should go with a term length that is long enough to cover all of your major financial commitments. But not so long that you end up paying for protection that you don’t actually require.
For instance, if you have a mortgage with a repayment period of 20 years. You should look for a policy that has a term of at least 20 years in order to cover your mortgage payments. If you have children, you should think about how many years you will need to provide financial support for them before they can become financially independent, as well as how much money you will need to cover their expenses.
What happens if my policy ends before I pass?
When your term life insurance policy expires, you will typically have two options. Either purchase a new policy at a higher premium or forgo having life insurance altogether. But if your insurance policy includes a guaranteed renewal clause, you will be able to extend your coverage on a year-to-year basis. In this case, though, you will have to pay a higher premium. If you have been diagnosed with a terminal illness that would otherwise render you ineligible for health insurance, purchasing this type of coverage may be financially worthwhile.
How much coverage should I buy?
It is recommended by industry professionals that you have life insurance coverage that is 10 to 15 times your annual income. You can get a better idea of how much life insurance coverage you require by first calculating your financial obligations and then deducting your liquid assets from that total. The sum that emerges will be your required amount of life insurance coverage.
What Is Better Term or Whole Life Insurance?
When compared to term life insurance, whole life insurance offers a number of advantages. Including the fact that it is permanent, the inclusion of a cash value investment component. And the provision of additional ways to safeguard the financial well-being of one’s family over the course of one’s lifetime. Because of these features, it is a better option for a large number of people. However, if you are only interested in receiving the largest death benefit possible for the amount of premiums paid, then term life insurance might be a better option for you.
Can You Cash Out Term Life Insurance?
No, you can not cash out on your term life insurance policy. While term life insurance is simple and inexpensive, it has limitations. The policy has no surrender value because it has no cash value. You also cannot borrow against your term policy.
If you would like to explore other types of life insurance policies we also have guides on:
- The Life Insurance Basics
- Whole Life Insurance
- Universal Life Insurance
- Final Expense Life Insurance
EZ Can Help!
Everyone has their own needs, priorities, and budgetary restrictions. We at EZ know that you’re looking for the most comprehensive protection for you and your loved ones without breaking the bank. We strive to make the process of buying insurance as easy as possible for you. And our agents are always available to assist you. We provide free services across the board. We help with everything from answering your most basic questions to guiding you through policy selection. Our agents can also help with the enrollment process and beyond will be provided to you at no extra charge. Just type your zip code in the box below or give us a call at 877-670-3560 to get started.
