What is Term Life Insurance
Term life insurance is a policy that provides coverage for a specified period of years. If the insured dies within the time limit, the death benefit is paid to their beneficiary.
How does term life insurance work?
Term life insurance policies can be purchased to cover almost any time period and will remain in effect as long as you continue to pay the premiums, which can be paid monthly or annually.
While term life insurance does not accumulate a cash value over time, which means you cannot borrow against it, it is less expensive in comparison and is still customizable to an individual's situation.
Payouts
In almost all cases, term life insurance pays out the policy's face value upon death. This payment, known as the death benefit or face value of the policy, can range from $10,000 to more than $1 million. The amount of coverage you require is determined by your personal financial situation. However, you should generally ensure that your family will be able to cover any outstanding financial obligations, such as your:
- Home loan
- Education for children (including college tuition)
- Funeral expenses
- Automobile loans
- Loans for students
- Costs of living (for several years)
If you die within the number of years that the term policy is in effect, the beneficiary will file a claim with the life insurance company. The insurer will usually request a copy of the deceased's death certificate before paying out the death benefit or protection amount in a lump sum or in annual payments.
Make sure the beneficiary is aware of the life insurance policy. To receive the benefits, they must file a claim.
Suicide is an exception to this rule. Because insurance companies handle this differently, we recommend that all parties read the terms. Suicide within two years of purchasing a life insurance policy is generally not covered.
Types of term life insurance policy
Term life insurance policies differ depending on a variety of factors, which means that the best policy for one person may not be the best policy for you. To find the right product for your family and finances, you must first understand how policies work.
Length of term
When selecting a term policy, you must decide how long you want the coverage period or term to be. If the insured person dies within that time frame, the life insurance company will pay the listed beneficiaries. While some policies are only valid for one year, term policies are typically available for the following time periods:
- 5 years
- 10 years
- 20 years
- 30 years
Many insurers also provide term coverage until you reach a certain age, such as 65, as an alternative. This is essentially the same product in that it provides coverage for a set number of years as long as the premiums are paid on time. However, age-based term life insurance frequently includes flexibility in terms of term length.
Level or decreasing term life insurance
When deciding between a level and decreasing term life insurance policy, consider whether your dependents would require less coverage if you died near the end of the term than if you died in the next few years. By definition, level term life insurance provides the same payout to the beneficiaries for the entire term.
If you are in the process of repaying loans, decreasing term life insurance may be more appropriate. Reduced term life insurance may be a good option if you want to ensure that your debts are not passed on to your family upon your death. It works like this: you pay a flat premium for the duration of the policy, but the face value (death benefit) of the policy decreases over time. The idea is that a person may require a larger death benefit earlier in life than they do later in life.
Renewable term life insurance
Short-term life insurance policies are frequently renewable, which means that you essentially purchase a new policy with the same insurer, under the same terms, every year (or five years, depending on the term). The benefits of this type of policy include the ability to obtain coverage for a limited time and the option to renew without having to go through a lengthy underwriting process. However, because you're older and in a higher risk category, your premiums will rise each time you renew.
Simplified issue and no medical exam life insurance
Simplified issue term life insurance, also known as "no medical exam" life insurance, may appear appealing. Nonetheless, it is a much more expensive product that may not be worth the convenience. These policies may be more expensive than others, but a medical exam for a life insurance policy typically takes less than an hour.
If you believe you will fail a medical exam, simplified issue insurance may be the best option for you. You will, however, be required to share your medical history with the insurer, and if you do not tell the truth and the insurer discovers that you have misrepresented anything, your policy may be cancelled.
Convertible Term Life Insurance
Convertible term life insurance policies are available from a variety of insurers. This type of insurance allows you to convert your term policy to a permanent policy without having to undergo a new medical exam.
Because your financial situation will change over time, we recommend having a convertible term policy. For example, if your income increases and you later decide that you want to take advantage of the tax benefits, you will have that option.
Because having a convertible policy does not change the insurer's risk while keeping the term policy in place, it should not raise your premiums and is generally only beneficial because it provides convenience if your financial situation changes. Just make a note of the time frame for which you are permitted to convert the policy.
Additional scenarios to understand
Riders
Riders are essentially insurance policy customizations. The number of riders available for a given policy varies depending on the insurer and insurance product chosen. Riders should be evaluated carefully because the financial benefits may not outweigh the actual cost.
Voluntary and group term life insurance
Voluntary term life insurance refers to the additional coverage that employees can choose to purchase, hence the term "voluntary." A group life insurance policy is typically provided by an employer as part of a compensation and benefits package. Term life insurance is more common in group and voluntary life insurance than permanent life insurance.
Your employer may suggest providing a certain amount of coverage at no cost in order for employees to take advantage of a discounted group rate to obtain additional coverage. While group term life insurance is less expensive, the policies are less customizable and frequently are not transferable, which means that coverage ends if you change jobs.
Given that the average tenure for employees at a specific job is less than five years, you'll most likely be transferred to a new company during the term of coverage. Before purchasing group coverage, it is critical to evaluate the available options and policy terms.
Direct term life insurance
Direct term life insurance is purchased by an individual rather than a third-party member such as an employer or family member.
Should I buy term life insurance?
It is entirely up to you whether or not you require term life insurance. Term life insurance is frequently purchased in response to life events such as marriage or the birth of a child.
Term life insurance protects partners, spouses, and dependents financially. If you are single and have no outstanding debts that could be passed on to your extended family or estate, you may not need to buy term life insurance.