Term life insurance is one of two general categories of life insurance. Term life is characterized by providing more economical coverage for a predetermined period, unlike whole life insurance, which entails lifelong coverage with a higher premium. Because term life insurance ends after the established period, policy premiums are usually much lower than whole life insurance options.
Term life insurance provides coverage up to the policy’s term limit.
Term life is typically more affordable and offers higher coverage limits than whole life policies.
Term insurance does not offer cash value or many of the benefits that are associated with the cash value of whole life policies.
The definition of a term life insurance policy
Term life insurance differs significantly from whole life. For example, whole life insurance provides coverage as long as the insured pays the policy premiums. For term insurance, coverage lasts only as long as the term allows, barring any sort of term or condition of the policy that would allow for extension.
Whole life also offers a cash value with the policy that must be managed by the insured or the insurance company. Term life is simple, as the only benefit the insured must be concerned with is the death benefit. However, this also means those with term policies cannot reap the benefits of a cash value amount tied to a policy, such as taking out a loan against the value using the accumulated cash value to pay premiums or simply withdrawing the amount.
Term insurance is a simple life policy offering only a death benefit. This policy usually lasts 10, 15, 20, or even 30 years, but this period is determined before the policy starts. These policies often allow the insured to purchase a more considerable death benefit at a more affordable rate and access to more coverage than what the insured may be approved for with a whole life policy.
How term life insurance works
Due to the distinct nature of term life insurance policies, it is essential to consider their unique functioning concerning the insured. When an individual seeks to acquire a term life policy, the procedure aligns with other policies, involving the evaluation of various factors such as the insured's age, weight, and habits to determine the premium cost. Subsequently, the insured makes premium payments until the conclusion of the policy term after coverage and premium costs have been established.
Should the insured pass away during the policy term, the death benefit is paid to the beneficiary. This amount is typically tax-free and can be used however the beneficiary sees fit. However, if the insured lives through the end of the policy’s term, they must choose to either allow the policy to lapse, renew it for another term, or convert it into a permanent policy in some cases. However, new policy premium rates must be determined based on the new factors related to the insured.
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Types of term life insurance policies
Just as with whole life insurance, term life offers multiple benefits. It is essential to determine what policy works best for you so you aren't paying for benefits you don't need.
Return of premium
Return of premium term life insurance policies functions like other term life policies in every way except with one difference. The insured purchases insurance for a term like usual. However, if the insured outlives the policy, all or a portion of the premiums paid into the policy are returned to the insured and are typically tax-free. The policy purchased determines whether part or the total amount of premiums are returned. However, these policies are often two or three times more expensive than typical term life insurance.
Level term life
Level term life insurance is the most common form of term insurance. This is simply term life insurance as it usually functions, with a yearly premium that remains the same throughout the policy's lifetime. This is an excellent benefit for the insured because life insurance costs can increase as the insured ages. Purchasing a level term policy locks in a rate as well as a level death benefit for as long as the policy is in effect.
Yearly renewable term life
Yearly renewable term life insurance is a temporary form of term life insurance. Policyholders can obtain coverage for one year and renew for another year. The insured is not required to undergo a medical examination each time. However, these policies increase their premiums as the insured ages. As a result, these policies are often great options for a short period but can increase in cost greatly over the long term.
Decreasing term life insurance policies are those with death benefits that reduce over time. These policies are often more affordable and beneficial because they are often used with a home mortgage loan or other form of debt. The insured purchases a policy with a death benefit that matches the loan amount and decreases to continually match the debt amount as it gradually gets paid off. This allows insureds to protect their family from worrying about outstanding debt should the insured pass away before their loans are fully paid.
Group term life
Group term life insurance is often provided by employers as a part of benefits packages. Depending on the company and the position the insured holds, employees may be able to get coverage for a spouse. The employer may pay a portion of the policy premiums, and the coverage amount will also differ. The employer often determines these factors. However, because the employer is retrieving coverage for many employees, insureds often do not have to worry about undergoing a medical exam to qualify for coverage.
Benefits of term life insurance policies
The benefits of a term life insurance policy are numerous. We have compiled a list of benefits for a term life policy below, outlining many. For simplicity, we will address the benefits of the most common term policy, level term insurance. There are other benefits with term life insurance, but below are some main benefits to help you consider what best suits your needs.
- Lower premiums than whole life. Allows the insured to leverage their money how they want.
- Qualify for higher coverage limits than whole life policies. Allows insureds to obtain more coverage than other policies. Especially beneficial for older insureds or those with riskier medical histories.
- The policy lasts for a set term. An excellent option for those with children or taking on new debt. They can purchase coverage until their needs change and reevaluate their coverage needs at that time.
- Coverage extension options. Insureds can often convert their term policy into a whole life policy, renew it, or allow their coverage to lapse, depending on their coverage needs.
Does term life insurance have cash value?
Term life insurance provides policyholders with a life insurance alternative that excludes cash value, aiming to maintain lower premium costs and enable individuals to qualify for increased coverage.
Without cash value, premiums must be paid by the insured as there is no means of borrowing or making premium payments from a term life policy.
How long does term life insurance last?
The duration of term life insurance corresponds to the time specified by the policy. While the most common term is 30 years, term insurance can range from one year to 40 years in certain instances. Typically, longer-term lengths incur higher costs for the term life option, making a 10-year policy more budget-friendly than a 30-year. However, upon the term's expiration, the policy's premiums may rise due to the insured's increased age, even if they choose to renew. Consequently, the insured must carefully consider the cost of the policy and the desired duration when weighing the advantages and disadvantages.
Term life insurance cost
The cost of term life insurance fluctuates, influenced by the insured's age, weight, medical history, coverage amount, policy term length, and other factors. Nevertheless, the most significant determinants are the insured's age, general health, and the chosen coverage amount. To provide a reasonable expectation, we have included a chart below based on $500,000 worth of coverage for a 30-year term. This covers coverage for both men and women nonsmokers in excellent health.
|$500,000 of coverage for 30-year term
|Average monthly cost for males
|Average monthly cost for females
What is the age limit for term insurance?
The older the insured, the more likely term insurance will become unaffordable. A shorter term can help keep costs low. However, the insured should always check policy terms and conditions to see if certain insurance companies stop providing term insurance at a certain age.
What are the disadvantages of term life insurance?
Term insurance does not have a cash value that grows with the policy, often has fewer riders available, and ends once the term ends. Term insurance seldom has living benefits, such as taking a loan against the policy's value. Term insurance only provides a death benefit.
Which is better: permanent or term life insurance?
Each type of insurance has advantages and disadvantages. The optimal approach is to evaluate both with the guidance of an insurance agent. Nonetheless, permanent life insurance offers enduring coverage, presenting a long-term perspective, whereas term life insurance offers a more economical but short-term alternative.