Term life insurance is the most popular life insurance type. Unlike permanent life insurance, term life insurance is very straightforward and easy to understand. Let’s have a deeper look at this type of insurance.
- What is Term Life Insurance?
- Common Product Features of Term Life Insurance
- Common Riders of Term Life Insurance Product
- Popular Term Life Insurance Types
- The Pros and Cons of Term Life Insurance
- Who is Term Life Insurance For?
- How Much does Term Life Insurance Cost?
What is Term Life Insurance?
Term life insurance guarantees a certain payout if you die sometime during the term of the insurance. There is no savings account attached, and no cash value as you see in whole life insurance or indexed universal or variable universal life insurance policies.
Term insurance is often for a period of ten, twenty years, or thirty years. According to Insurance Information Institute, twenty-year-term is the most popular one. If you die sometime during those years, your beneficiaries get the money. If you are still alive at the end of the term, the insurance company keeps it. Think about it like car insurance, you buy car insurance but wish that you never have to use it. And you don’t use it, insurance companies keep it all.
Most good employers offer some basic term life insurance to their employees in their benefit package through what is known as group term life insurance. It is usually free or low cost and requires no medical exams to employees
>>MORE: Differences Between Term Life and Whole Life Insurance
Common Product Features of Term Life Insurance
Term life insurance is straightforward and easy to understand. Common features of term life insurance include:
- Coverage: Temporary coverage, for the term of the policy
- Low-cost: For a healthy male in his 30s, a $250,000 term life policy can be as cheap as $30 a month, which is 5-10 times cheaper than whole life insurance policies. See How Much Whole Life Insurance Costs
- Monthly premiums are usually fixed for the whole term, with exception for decreasing term life type that we are discussing below
- No cash value
- Renewable: Usually renewable when the original term expires, but for a higher cost because you will be a lot older when you renew
- Convertible: Can sometimes be converted to a cash-value life insurance policy or whole life insurance policy during certain periods, but this will raise your rates. The new rates are the rates for the permanent life insurance, which is a lot more expensive. In addition, when you convert, you are older than when you first bought the term life policy. If you think this is a possibility, you need to double check with the insurance company when you buy your term policy. Some companies do not offer this feature. Learn more about Convertible Term Life Insurance
- Medical exam: As in buying any life insurance policy, your health condition is the most important factor for insurance companies to determine if they can sell a life insurance policy to you and if they do, at what price. So, many insurance companies require you to do a medical exam before they can finalize your monthly premium and issue the policy. However, more and more insurance companies are offering accelerated underwriting process for term life insurance product, which means they no longer require you to do a medical exam. However, only healthy people are eligible for this option. After your submit your application, insurance companies will let you know if you are eligible for no medical exam.
- Compare quotes and shopping: Unlike permanent life insurance, which is very complicated and nuanced and usually requires you to work with an agent or advisor, term life is very simple and straightforward. Most companies allow you to get a quote online or you can compare quotes of multiple companies on digital brokers’ websites such as PolicyGenius, Quotacy, or HealthIQ.
>>MORE: Decreasing Term Life Insurance: Is It a Good Choice?
Common Riders of Term Life Insurance Product
As with any insurance, you can attach riders to your term insurance. Some of the most popular riders are:
- Waiver of premium: If you become disabled and can no longer work, this rider pays the remainder of the premiums so that the policyholder is still covered for the rest of the term.
- Accelerated death benefits: If you are diagnosed with a terminal illness or chronic disease requiring long term care, the insurance company will advance a portion of the death benefit to you, so you can pay your medical bills. This rider enables your life insurance policy to provide you with living benefits. Learn more if Life Insurance With Living Benefits Worth It
- Guaranteed insurability: This allows you to add coverage to the policy without a medical exam. This is also needed if you think you may convert to a permanent life insurance policy later. Learn more about Convertible Term Life Insurance
- Accidental death benefit: This pays up to twice the face value (depending on the company) of the policy if you die in an accident. Learn more What is Accidental Death Life Insurance? Its Pros & Cons, and Cost?
- Child term rider: Covers the cost of the funeral if your child dies.
- Return of premium rider: This is the most expensive rider, but it might be worth it. If you outlive the term of your policy, this rider has the insurance company pay all the premiums you’ve paid them in a tax-free lump sum. Keep in mind, this is an amount nowhere near the face value of the policy, only the premiums you’ve paid.
- Guaranteed Insurability Rider: This rider allows you to add coverage to your life insurance policy at a later date or at life events like marriage or the birth of a child without having to undergo medical exams or questions. This rider is more popular among permanent life insurance policies than term life ones.
>>MORE: Life Insurance Policy: Everything You Need to Know
Popular Term Life Insurance Types
- Level Premium Term Life: This is the most popular term life insurance type. As the name suggests, the premium for this term life policy type stays the same during the term.
- Decreasing Term Life: The premium for this term policy decreases after some period. This usually reflects the needs of the insureds – having more financial responsibility during the early years of the term such as childcare and less so during the later years of the term. SBLI, an established mutual life insurance company, offer SmartTerm 360 product, a decreasing term life policy designed to cater to this decreasing financial responsibilities of consumers. In their analysis, this product would save consumers 38% premiums for the 30 year period.
- >>MORE: Decreasing Term Life Insurance: Is It a Good Choice?
- Annual Renewable Term: This term life product allows consumers to decide if they renew every year. However, if they do, the premium usually increase after each year.
- Convertible Term: As mentioned above, some term life policies allows the insureds to convert to permanent life policies during some period set by the insurance companies.
- Return Of Premium: As discussed above, this can be offered as a rider to any term life policies. However, some insurance companies offer a separate product for this type. If the insureds outlive the term of their policies, a portion of the premiums will be returned to the insureds. The premium of this product is usually a lot more expensive, about 30% higher monthly premium. If you are interested in this type of term life, State Farm and AAA life insurance offers such an option.
The Pros and Cons of Term Life Insurance
Pros:
- Term life insurance is easy to understand
- The most affordable insurance
- Pay only for the coverage you need
- You can easily get quotes and buy the policy completely online
Cons:
- No cash value or other savings attached
- Once the term of the policy expires, it’s over. You could buy more insurance, but you’re older and insurance will be more expensive.
>>MORE: Can I Sell My Term Life Insurance Policy for Cash? and What Do I Need to Do to Sell My Term Life Insurance Policy?
Who is Term Life Insurance For?
Term life insurance is a good choice for families with young children. If one of the primary breadwinners die, the money from the insurance policy will help replace the lost income. The money can be used to pay funeral costs, pay off a mortgage, pay for college, or whatever else the family needs.
At the end of the term, hopefully your dependent children will be off on their own and your house will be paid for, so you won’t really need life insurance benefits.
>>MORE: Who Should Consider Whole Life Insurance and Who Shouldn’t?
How Much does Term Life Insurance Cost?
One good thing about term life insurance is that it’s easy to get an instant quotes online. First, you have to figure out how much life insurance you need. Most people to get a policy that is 10-15 times their income.
Many things will affect the cost of your life insurance policy. Any life insurance company will look at your age, gender, health condition, if you are a smoker, your job, and your hobbies to determine your premiums. As such, premiums vary by individuals and different companies usually offer different quotes for the same individual. Shopping online with multiple companies or digital brokers such as Quotacy or PolicyGenius will allow you to compare quotes and select the best one for you.
We compare quotes from 15+ companies for different consumer profiles. All are in great health condition. Below are the lowest and highest quotes and their companies for your reference.
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>>MORE: How Much does Whole Life Insurance Cost?
Last Thoughts
Term life insurance is a smart idea. It protects your family should anything happen to you. It’s usually available for a reasonable cost, and it lets you sleep at night, knowing your loved ones will be financially secure if anything happens to you.