Haris Ashley
Term life insurance is a type of insurance that provides coverage for a specific period, often 10 to 30 years. It is a relatively inexpensive way to provide financial protection for your family if you die. The younger and healthier you are, the lower your premium will be. Term life insurance is often the most affordable life insurance because it offers a death benefit for a restricted time and doesn't have a cash value component. If you die during the policy term, the insurer will pay the policy's face value to your beneficiaries, which can be used to cover expenses like debts, funeral costs, or other financial needs. However, if you outlive the policy term, your beneficiaries won't receive any money, and you may need to renew your policy or purchase a new one.
| Characteristics | Values |
|---|---|
| Length of coverage | Typically 10, 20 or 30 years, but can be as short as 5 years or as long as 40 years |
| Cash value | None |
| Cost | Cheapest type of life insurance |
| Purpose | Provides financial protection for a set period |
| Death benefit | Paid to beneficiaries if the insured dies during the term |
| Cost factors | Age, health, lifestyle, coverage amount, term length |
| Types | Level term, yearly renewable term, decreasing term, increasing term, convertible term, renewable term, group term, return of premium term |
What You'll Learn
How long should term life insurance last?
Term life insurance policies typically last for a set period, such as 5, 10, 15, 20, 25, or 30 years. Some insurers even offer coverage for up to 40 years. The duration of your financial commitments will generally determine how long your term life insurance policy should last.
- The length of your mortgage: If you want your life insurance to cover your mortgage, consider how many years you have left on your mortgage payments. You don't want your policy to expire before you finish paying off your house.
- How long until your children are financially independent: Consider how long it will be until your children are supporting themselves. This may be a few years beyond age 18, especially if you plan to pay for their college education.
- The number of years until you retire: If you're buying term life insurance to replace your income, you may not need it after retirement. Once you have sufficient retirement savings and investments, life insurance may no longer be necessary.
When choosing the length of your term life insurance, it's important to carefully consider your current financial obligations, including any outstanding debts, to ensure that your policy provides adequate coverage for your specific situation and needs.
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What is term life insurance?
Term life insurance is a type of life insurance policy that provides coverage for a specified period, such as 10, 15, 20, or 30 years. It is often referred to as "level term" or "level-premium" insurance because the value of the death benefit and the price of the premiums remain the same throughout the policy's term. The death benefit is a guaranteed payment made to the policyholder's beneficiaries in the event of their death during the specified term.
Term life insurance is a simple and cost-effective way to provide financial protection for loved ones. It is typically more affordable than other types of life insurance, such as whole life or universal life insurance. The premiums are based on factors such as age, health, and life expectancy, and may also include a medical exam and other considerations like driving record and occupation.
Term life insurance policies do not accumulate cash value and have no payout if the policyholder outlives the term. However, some policies offer the option to renew for another term, convert to a permanent policy, or include a return of premium feature, where all or a portion of the premiums are refunded if the policy expires without a claim.
The choice of term length depends on financial responsibilities, such as mortgage payments or children's education. It is important to consider the length of coverage needed and the desired level of death benefit. Term life insurance is particularly attractive to young people with children or those with growing families, as it offers substantial coverage at a low cost.
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How much does it cost?
The cost of term life insurance depends on several factors, including age, gender, health, and lifestyle.
Term life insurance is considered a temporary policy, usually lasting for a set period, such as 10, 20, or 30 years. It is generally more affordable than permanent life insurance policies, such as whole life or universal life insurance.
The average cost of a term life insurance premium is around $160 per year, which is significantly lower than what most people expect. For example, a healthy 30-year-old woman can purchase a $20,000 term life insurance policy for less than $8 per month. Older individuals can also find affordable options; a 55-year-old woman may be able to secure a $20,000 policy for around $25.50 per month.
The length of the term selected will impact the cost, with longer terms resulting in higher premiums. Additionally, the amount of insurance coverage will affect the price, with higher coverage amounts leading to increased rates.
Other factors that can influence the cost of term life insurance include:
- Health: Pre-existing health conditions, blood pressure, cholesterol levels, and weight can affect premiums.
- Smoking status: Tobacco users typically pay more due to the associated health risks.
- Lifestyle and hobbies: Risky activities, such as skydiving or racing, can result in higher rates.
- Occupation: Hazardous or high-risk jobs, like police officers or firefighters, often lead to higher premiums.
- Family medical history: A history of serious health conditions in the family may increase rates.
- Driving record: DUIs, DWIs, and major traffic violations can make individuals appear high-risk, leading to higher premiums.
It is important to note that term life insurance rates increase with age, so purchasing a policy earlier in life can help secure lower premiums.
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What are the pros and cons?
Term life insurance is a type of policy that offers financial protection for a set period, usually 10 to 30 years. It is a relatively inexpensive way to provide money for your family if you die. Here are some pros and cons of term life insurance to help you decide if it's the right option for you.
Pros of Term Life Insurance:
- Affordability: Term life insurance is typically much cheaper than whole life insurance because it offers temporary coverage and doesn't build cash value.
- More Coverage Available: With term life insurance, you can buy a large amount of coverage ($1 million or more) at an affordable price.
- Tax-Free Death Benefit: The death benefit paid to beneficiaries is usually tax-free.
- Flexible Payment and Policy Options: You can choose to pay premiums monthly, quarterly, semi-annually, or annually, and select a policy term that fits your needs, typically in increments of five years from five to 30 years.
- No Penalty for Canceling: You can cancel your term life insurance policy at any time without incurring any fees or penalties.
Cons of Term Life Insurance:
- Temporary Coverage: Term life insurance only provides temporary coverage, so it may not be suitable for those with permanent life insurance needs, such as funeral expenses or long-term care for a special needs child.
- No Cash Value: Term life insurance doesn't build cash value, so there is no savings component or surrender value if you cancel the policy.
- Lower Age Cap: The maximum age limit for term life insurance is generally lower than for permanent life insurance, and the availability of longer-term policies may be limited for older individuals.
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Who should buy it?
Term life insurance is a good option for people who want substantial coverage at a low cost. It is ideal for those with temporary financial needs, such as young, newlywed couples, sole financial providers, individuals with significant debts, and stay-at-home parents.
Young, Newlywed Couples
Young couples may want to buy term life insurance coverage because the younger and healthier you are, the better your rates will be. Term life insurance can help couples with many financial needs, including replacing income, paying off outstanding debts like a mortgage, car and student loans, and covering future financial needs like childcare and education costs.
Sole Financial Providers
Losing a sole source of income can be detrimental to a family. The remaining parent can use the term life insurance death benefit as income replacement, allowing them to stay at home with their children instead of having to work immediately. The proceeds can also be used for everyday expenses, current and future childcare, and education costs.
Individuals With Significant Debts
Term life insurance can be used to pay off debts upon the insured's death. The designated beneficiary will use the death benefit proceeds to pay off those debts—like student loans or a mortgage—rather than have to pay them out of pocket or forfeit the property. Proceeds can also be used to replace income or provide current and future financial support for remaining family members.
Stay-at-Home Parents
Stay-at-home parents provide enormous benefits to their families, allowing the other parent to work and earn income. Buying term life insurance for the stay-at-home parent means the working parent can continue working or stay home with the kids if they choose. The term life insurance death benefit can then be used for income replacement or to pay for childcare and other expenses.
Business Owners
Business owners can use term life insurance payout proceeds to pay off debts, expenses, and outstanding taxes. The details are typically outlined in a buy-sell agreement contract, which is especially important if ownership or shares in the company are to be transferred to another party. Owners with valuable employees can also take out term life insurance on them, often called key person insurance. In this case, the owner pays for the policy, and the company is the beneficiary, receiving the death benefit if the key employee dies.
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Frequently asked questions
When a term life insurance policy expires, coverage ends and you no longer need to make premium payments. However, you may have several options, such as extending the policy annually, buying a new term policy, or converting it to permanent life insurance. Some insurers may not require a new medical exam for renewal or conversion, but premiums will usually increase.
In most cases, no. Term life insurance does not build cash value like a whole life insurance policy. Term life insurance is typically much cheaper than permanent life insurance, allowing you to use the difference in cost to fund your savings or investments over time.
The duration of your term life insurance policy should be based on your financial obligations, such as the length of your mortgage or until your children are financially independent. It's important to choose a term that covers all your major financial commitments.
