Term Life InsuranceTerm life insurance, also known as pure life insurance, is a type of death benefit that pays the heirs of the policyholder throughout a specified period of time. Show
Once the term expires, the policyholder can either renew it for another term, convert the policy to permanent coverage, or allow the term life insurance policy to lapse. Key Takeaways
Term Life Insurance ExplainedHow Term Life Insurance WorksWhen you buy a term life insurance policy, the insurance company determines the premium based on the policy's value (the payout amount) and your age, gender, and health. In some cases, a medical exam may be required. The insurance company may also inquire about your driving record, current medications, smoking status, occupation, hobbies, and family history. If you die during the policy term, the insurer will pay the policy's face value to your beneficiaries. This cash benefit—which is, in most cases, not taxable—may be used by beneficiaries to settle your healthcare and funeral costs, consumer debt, or mortgage debt, among other things. If the policy expires before your death, there is no payout. You may be able to renew a term policy at its expiration, but the premiums will be recalculated based on your age at the time of renewal. Term Life Insurance vs. Whole Life InsuranceTerm life policies have no value other than the guaranteed death benefit. There is no savings component as is found in a whole life insurance product. Term life is usually the least costly life insurance available because it offers a benefit for a restricted time and provides only a death benefit. For example, a healthy non-smoking man aged 35 could get a whole life insurance policy with a benefit of $500,000 for an average of $28 per month as of 2021. At age 50, the premium would rise to $71 a month. Depending on the issuer, purchasing a whole life equivalent would have significantly higher premiums, possibly $200 to $300 per month, or more. Most term life insurance policies expire without paying a death benefit. That lowers the overall risk to the insurer compared to a permanent life policy. The reduced risk allows insurers to charge lower premiums. Interest rates, the financials of the insurance company, and state regulations can also affect premiums. In general, companies often offer better rates at the "breakpoint" coverage levels of $100,000, $250,000, $500,000, and $1,000,000. When you consider the amount of coverage you can get for your premium dollars, term life insurance tends to be the least expensive option for life insurance. Check our recommendations for the best term life insurance policies when you are ready to buy. Top-Rated Term Life Insurance CompaniesExample of Term Life InsuranceThirty-year-old George wants to protect his family in the unlikely event of his early death. He buys a 10-year, $500,000 term life insurance policy with a premium of $50 per month. If George dies within the 10-year term, the policy will pay George’s beneficiary $500,000. If he dies after he turns 40, when the policy has expired, his beneficiary will receive no benefit. If he renews the policy, the premiums will be higher than his initial policy because they will be based on his current age of 40 rather than 30. If George is diagnosed with a terminal illness during the first policy term, he probably will not be eligible to renew the policy when it expires. Some policies offer guaranteed re-insurability (without proof of insurability), but such features, when available, come with a higher cost. Types of Term Life InsuranceThere are several types of term life insurance. The best option will depend on your individual circumstances. The Level Term or Level-Premium PolicyThese provide coverage for a period ranging from 10 to 30 years. Both the death benefit and the premium are fixed. Because actuaries must account for the increasing costs of insurance over the life of the policy's effectiveness, the premium is comparatively higher than yearly renewable term life insurance. The Yearly Renewable Term (YRT) PolicyYearly renewable term (YRT) policies have no specified term but can be renewed each year without providing evidence of insurability. The premiums rise from year to year as the insured person ages. There is no specified term, but the premiums can become prohibitively expensive as the policyholder ages, making the policy. The Decreasing Term PolicyThese policies have a death benefit that declines each year, according to a predetermined schedule. The policyholder pays a fixed, level premium for the duration of the policy. Decreasing term policies are often used in concert with a mortgage, with the policyholder matching the payout of the insurance with the declining principal of the home loan. Benefits of Term Life InsuranceTerm life insurance is attractive to young people with children. The parents can obtain substantial coverage for a low cost. If the payout is needed, the family can rely on it to replace lost income. These policies are also well-suited for people with growing families. They can anticipate that coverage will be needed until, say, their children have reached adulthood and are self-sufficient. The term life benefit, obviously, may be equally useful to an older surviving spouse. However, other options for providing for a surviving spouse may be preferable given the higher costs of the premiums to older policyholders. Insurance companies set a maximum age for their term life insurance coverage. This ranges from about 80 to 90 years old. Do I Need Term Life Insurance or Permanent Life Insurance?The main differences between a term life insurance policy and a permanent insurance policy, such as universal life insurance, are the duration of the policy, the accumulation of a cash value, and the cost. The right choice for you will depend on your needs. Here are some things to consider. Cost of PremiumsTerm life policies are ideal for people who want substantial coverage at a low cost. People who own whole life insurance pay more in premiums for less coverage but have the security of knowing they are protected for life. People who buy term life are paying premiums for an extended period, and getting nothing in return unless they have the misfortune to die before the term expires. And, term life insurance premiums increase with age. This means that term life premiums may cost more over the years than permanent life insurance premiums would have been. Availability of CoverageUnless a term policy has guaranteed renewable policy, the company could refuse to renew coverage at the end of a policy's term if the policyholder developed a severe illness. Permanent insurance provides coverage for life as long as the premiums are paid. Investment ValueSome customers prefer permanent life insurance because the policies can have an investment or savings vehicle. A portion of each premium payment is allocated to the cash value, with a growth guarantee. Some plans pay dividends, which can be paid out or kept on deposit within the policy. Over time, the cash value growth may be sufficient to pay the premiums on the policy. There are also several unique tax benefits, such as tax-deferred cash value growth and tax-free access to the cash portion. Financial advisors warn that the growth rate of a policy with cash value is often paltry compared to other financial instruments, such as mutual funds and exchange-traded funds (ETFs). Also, substantial administrative fees often cut into the rate of return. Hence, the common phrase "buy term and invest the difference." However, the performance is steady and tax-advantaged, a benefit when the stock market is volatile. Other FactorsApparently, there is no one-size-fits-all answer to the term versus permanent insurance debate. Other factors to consider include:
Term Life Insurance vs. Convertible Term Life InsuranceConvertible term life insurance is a term life policy that includes a conversion rider. The rider guarantees the right to convert an in-force term policy—or one about to expire—to a permanent plan without going through underwriting or proving insurability. The conversion rider should allow you to convert to any permanent policy the insurance company offers with no restrictions. The primary features of the rider are maintaining the original health rating of the term policy upon conversion, even if you later have health issues or become uninsurable, and deciding when and how much of the coverage to convert. The basis for the premium of the new permanent policy is your age at conversion. Of course, overall premiums will increase significantly since whole life insurance is more expensive than term life insurance. The advantage is the guaranteed approval without a medical exam. Medical conditions that develop during the term life period cannot adjust premiums upward. However, the company may require limited or full underwriting if you want to add additional riders to the new policy, such as a long-term care rider. Which Is Better: Term Life Insurance or Whole Life Insurance?It depends on your family's needs. Term life insurance is a relatively inexpensive way to provide a lump sum to your dependents if something happens to you. If you are young and healthy, and you support a family, it can be a good option. Whole life insurance comes with substantially higher monthly premiums. It is meant to be renewed for as long as you live, and as the coverage matures the policy grows in value and the policyholder can make withdrawals for any purpose. So it can serve as an investment product as well as an insurance policy. Do You Get Your Money Back at the End of a Term Life Insurance Policy?If you're alive when the term expires, you get nothing back from your term life insurance policy. It is a death benefit, payable to your heirs only if you die. That is the reason why term life insurance is relatively inexpensive. Most people outlive their term life insurance policies. Can a Senior Citizen Get Term Life Insurance?The insurance companies have a maximum age limit for term life insurance policies. This is usually 80 to 90 years old. The premium also rises with age, so a person aged 60 or 70 will pay substantially more than someone decades younger. The Bottom LineTerm life insurance is a good option for people who can't or won't pay the much higher monthly premiums associated with whole life insurance. It's a bit like car insurance. It's statistically unlikely that you'll need it, and the premiums are money down the drain if you don't. But you have it just in case the worst happens. Which of the following is not true of term life insurance?Which of the following is not true about term insurance? Term insurance does NOT build any cash value. While age is not the only consideration, premiums are generally lower for younger insureds. The correct answer is: Term insurance builds cash value.
Which of the following statements regarding term life insurance is true quizlet?Which of the following statements regarding term life insurance is true? Term life usually offers lower initial premiums than other types of insurance.
Which of the following is not a characteristic of term life insurance?All of the following are characteristics of term insurance, EXCEPT: Term policies do not accrue cash value.
What are 4 types of term life insurance?Common types of level term. Yearly- (or annually-) renewable term.. 5-year renewable term.. 10-year term.. 15-year term.. 20-year term.. 25-year term.. 30-year term.. Term to a specified age (usually 65). |