What Is Term Life Insurance? – Forbes Advisor

October 21, 2022

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Term life insurance is the best option for people who want to cover the financial obligations that are common when starting a family.

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With term life insurance in place, there’s a safety net that can provide funds to pay off a mortgage, send the kids to college, or other important concerns if you’re no longer around.

Reading: Why should i buy term life insurance

what is term life insurance?

Term life insurance is a contract between the policyholder and an insurance company that stipulates that if the insured person dies within the policy time period, the insurer will pay a death benefit to the beneficiaries named in the policy.

If you’re shopping for term life insurance, you have two main decisions to make: the length of the term and the amount of coverage.

key features of term life insurance

The key features of term life insurance are:

This is usually the cheapest way to buy life insurance.
Term life insurance policies have a specific period of time when their rates are locked in.
There is no cash value in a term life insurance policy.

how a term life insurance policy works

The annual costs of a term life insurance policy remain the same each year over the level term period, such as 10 or 20 years. once the level term period ends, you can usually renew the policy, but at higher rates each year you renew.

The policy expires if you exceed the duration of the policy without renewing it. you do not receive any of the premiums paid on the policy unless you have purchased a return-of-premium term life insurance policy.

many people buy term life insurance to replace income. They are looking for life insurance that would provide funds for a family to pay expenses for a certain number of years if they were no longer there to work and earn money. term life is good for:

cover the years of a mortgage, so another borrower doesn’t have to sell the house.
cover other specific debts that would be passed on to someone else.
cover the years until children graduate from college, to ensure there is funding for tuition and living expenses.

The policyholder chooses both the length of the term and the amount of coverage, such as $500,000.

If the insured person dies while coverage is in force, the beneficiaries receive the policy’s death benefit. If the insured lives longer than the term of the policy and does not renew it, the coverage ends.

You may be able to convert the term life policy to a permanent life policy, such as whole life or universal life. this is a useful tactic if you realize you want longer life insurance coverage and don’t want to buy a new policy, perhaps because your current health would make it difficult.

types of term life insurance

level term life insurance

A level term life insurance policy maintains the same premiums and death benefit throughout the term. rates will not increase as you age and the death benefit is constant whether you die in the first or last year of the policy.

A level term life insurance policy might be good for someone who wants consistency over many years.

annual renewable term life insurance

The premiums for an annual renewable term policy increase each year you renew it. When you choose this policy, you are guaranteed to maintain coverage and do not need to reapply.

may be good for people who want to fill a small gap in life insurance. however, a short-term life policy may be a better option.

declining term life insurance

The premiums on a declining term life insurance policy stay the same for the life of the policy, but the death benefit steadily decreases over time.

mortgage life insurance is a form of decreasing term life insurance. here the payment is linked to the declining balance of your mortgage, and the beneficiary is the mortgage lender, not his family.

Regular term life insurance is a better bet because your family gets paid and can use it for whatever expenses they choose.

term life insurance premium return

A return-of-premium term life policy promises to refund the premiums you paid if you outlive the policy. As you can imagine, the reimbursement function makes the policy more expensive.

Return-of-premium term life insurance is available from companies like Cincinnati Life, State Farm Life, and Vantis Life.

how much does term life insurance cost?

Age and health are important factors in life insurance rates when you buy a policy. Below are sample rates for healthy life insurance buyers.

examples of annual costs for $1 million 20-year term life insurance

Related: Average Life Insurance Rates

factors that could affect term life insurance rates

The amount of term life insurance coverage and the length of the term affect your premiums. Other factors in life insurance quotes include:

age
gender
height and weight
current and past health
family medical history (parents and siblings)
nicotine and marijuana use
history of substance abuse
driving record (especially DUIs and traffic violations)
certain hobbies and activities (such as aviation, scuba diving, and other risky hobbies)
criminal record
credit

How much term life insurance do you need?

A good amount of term life insurance is usually one that matches the debts or obligations you want to cover. life insurance is often meant to pay for a family’s expenses that would have been paid for out of the person’s salary.

If your goal is income replacement, you’ll want to know the approximate amount your family would need to maintain your standard of living for the period of time you want to cover.

related: how much life insurance do I need?

choosing the duration of term life insurance

To choose the best duration for a term life insurance policy, consider the length of the debt or the situation you want to cover. For example, if you’re buying term life insurance to cover the years until your children finish college, and that’s in nine years, you can choose 10-year term life insurance. If you just bought a home and got a 30-year mortgage, you’re probably looking at a 30-year term life.

Term life insurance is generally available in terms of 5, 10, 15, 20, 25 and 30 years. some companies offer longer terms of 35 and 40 years (such as banner life and protect).

& general america, owner of banner life.

If your family’s financial needs extend beyond the typical length of term life, consider a permanent life insurance policy, such as universal life insurance.

most common duration of term life insurance

what happens if you outlive a term life policy?

When your entry-level term period ends (for example, at the end of 10, 20, or 30 years), you can renew the policy at a higher rate each year. you will not receive a refund for premiums paid (unless you purchased “return of premium” term life insurance).

It’s a good idea to get quotes for a new policy before you pay the higher renewal fee. Even if you’re older and in less health, you might still find a better deal on a new policy.

Some people decide they no longer need life insurance before they reach the end of the term and stop making payments. Before you go down this route, make sure you really don’t need life insurance anymore. if a policy ends and your life circumstances change later, you may regret not keeping the policy.

choosing a term life insurance company

It’s a good idea to compare life insurance quotes to start your life insurance shopping journey. You may be tempted to focus solely on cost when choosing an insurer. But the best term life insurance companies will offer benefits that give you flexibility at a good price.

Hedging features to look for include:

Are there living benefits? These allow you to access your own death benefit in cases of serious illness. you can use the money to pay for medical expenses or anything else.
Is the policy guaranteed to be renewable? This allows you to renew the policy (at a higher price) after the term of the level is exhausted. can be helpful if you reach the end of the level term period and still need life insurance but have health problems.
Can you convert the term policy to a permanent policy? This allows you to switch to a permanent life insurance policy. but there is usually a deadline to do so, so make sure you know your window of time to convert to a permanent policy.
Can you change the face amount of the policy? If your life insurance needs change in the future, can you adjust the amount of your coverage? usually you can only adjust downwards.

other tips for buying term life insurance

Tiered Life Insurance: If you have life insurance needs of different durations, you can scale life insurance policies to save money. For example, you can buy a 30-year policy to cover the duration of a mortgage and a 20-year policy (or 30-year policy rider) to cover the time until the children finish college. this way, you won’t bundle all the obligations into one long policy.
Temporary Insurance: You often have the option to include a check for your first premium payment with your application and lock in coverage from the date of your application forward. it is common for an application to take a month or more to process. this gives you coverage during the application process. ask your agent about this “temporary coverage” before you apply.

related: best life insurance companies

what to expect when applying for term life insurance

When you have a quote you like and you’re ready to buy a policy, you’ll fill out an application. the life insurance agent will likely review your application responses. you may be asked to sign authorizations, such as one for your medical records.

Once the application is submitted to the insurance company, you may be required to complete a life insurance medical exam. this often includes height, weight, blood pressure, blood and urine samples, and questions about your prescriptions and your health to verify the information on the application.

Depending on your age and/or the amount of insurance requested, a life insurer may also request an EKG or cognitive evaluation.

Behind the scenes, the life insurance company will do their own research on you. this often includes:

access a prescription drug database to view your current and past prescriptions.
request your medical records (if you signed a consent form).
withdraw your motor vehicle report.
access information from previous applications for mib group individual life and health insurance.
for large amounts of life insurance, such as $5 million and up, obtain a financial statement verified by a third party.

checklist for the buyer of term life insurance

Here’s how to organize a term life insurance shopping effort.

decide how much coverage you need

Use our free life insurance calculator to estimate your life insurance needs. In general, add the expenses you want to cover (income replacement, college tuition, etc.) and subtract the assets your family could use if you pass away (such as existing life insurance). don’t underestimate your coverage estimate. when in doubt, opt for more coverage. a life insurance agent can also guide you through calculations of a coverage amount.

choose a term length

purchase a duration that covers the number of years you want to cover. During this term, such as 20 years, your rates will remain fixed. For example, you may want coverage to last until you retire or until your children have graduated from college.

If you want to skip the life insurance medical exam, ask your insurance agent about no-exam options

Younger, healthier buyers will have more no-exam life insurance options. But if you’re 50 or older, or you don’t have a good health history, you may not be able to find affordable options without screenings.

find prices

Gather multiple term life insurance quotes. In addition to price, look at policy features such as life benefits and the ability to convert to permanent life.

term life insurance alternatives

Term life insurance isn’t the only type of life insurance. There are also multiple types of permanent life insurance policies.

Unlike term life insurance, permanent life policies last your lifetime as long as you make your payments. therefore, beneficiaries are guaranteed a death benefit with a permanent life policy. These policies also build cash value, allowing the policyholder to access the policy for the life of the policy.

here are different permanent life insurance policies:

whole life insurance

Whole life insurance guarantees a death benefit as long as you make your payments. it also guarantees you a minimum rate of return on cash value, level premiums, and a guaranteed death benefit that won’t go down.

universal life insurance

Universal life insurance policies offer lifetime coverage and often build cash value, which grows tax-free. you may be able to adjust your premium payments and death benefit, within certain limits.

There are multiple types of universal life insurance policies:

Guaranteed Universal Life: The cheapest universal life policy, a guaranteed universal life policy typically offers cash value, which can be minimal. however, it does not offer the flexibility to adjust premiums and the death benefit, which are found in some other universal life policies.
Indexed Universal Life: An indexed universal life insurance policy connects the cash value of a policy to an index, such as the S&P 500. It can change premiums and the death benefit , within certain limits.
Variable Universal Life: The cash value of a variable universal life insurance policy is tied to subaccounts that can include stocks and bonds. the success of the investment options affects the cash value of the policy. you have the flexibility to make changes to premiums and the death benefit. A variable universal policy requires the policyholder to manage the investments and can make a profit or loss based on your choices.

variable life insurance

Like variable universal life insurance, variable life insurance is a type of permanent life insurance. both offer investment options and the cash value will vary based on market performance. but they differ in how premiums and death benefits are administered.

Variable Life Insurance: You cannot adjust your premium with a variable life insurance policy. In addition, variable life insurance guarantees that the death benefit will not fall below a specified dollar amount, regardless of investment performance.