Term Life Insurance: Temporary Cover For Permanent Peace Of Mind?

Term life insurance is a type of insurance that provides coverage for a specific period, such as 10, 15, or 20 years. It is a contract between the policyholder and the insurance company, where the insured person pays a premium for a set term, and the insurer promises to pay a death benefit to the beneficiaries upon the insured person's death during that term. Term life insurance is generally the most affordable option and is ideal for those who want coverage for a specific period or have temporary financial obligations. However, it does not build cash value, and the policy expires if the insured person outlives the term without renewing. On the other hand, whole life insurance, a type of permanent life insurance, offers lifelong coverage and includes a cash value component that grows over time. While whole life insurance provides lasting coverage, it is significantly more expensive than term life insurance.

Term life insurance vs. permanent life insurance

Term life insurance and permanent life insurance are both designed to protect the financial well-being of your loved ones in the event of your death. However, they differ in terms of length of coverage, features and benefits, and premium structures.

Length of Coverage

Term life insurance provides temporary protection for a set period, often 10 to 30 years. The coverage can be renewed, but only up to a specific age, and premiums generally increase with each renewal. On the other hand, permanent life insurance, as the name suggests, offers long-term or lifelong coverage as long as you continue to pay the premiums.

Benefits

Term life insurance offers short-term death benefit protection, with beneficiaries receiving a lump-sum payout if the insured passes away during the term. Some term policies also offer flexible features, such as allowing early access to benefits if the insured becomes terminally ill. Permanent life insurance provides long-term death benefit protection and the opportunity to build cash value. This cash value can be accessed to cover unexpected emergencies or milestone expenses like college or retirement.

Cost

With term life insurance, premiums are locked in for the selected coverage period but increase if the coverage is renewed. Whole life insurance, a type of permanent life insurance, typically has higher initial premiums, but these are locked in and do not increase over time, potentially making it a better value in the long run.

Who Should Choose Term Life Insurance?

Term life insurance is ideal for those who need short-term or additional protection during specific times, are on a budget, or want flexibility in case their needs or circumstances change. It is also a good option for those with other financial assets to leave as an inheritance.

Who Should Choose Permanent Life Insurance?

Permanent life insurance is suitable for those who need long-term financial protection, want to create an inheritance for their heirs, seek a tax-advantaged way to save for future expenses, or prefer stable premiums.

How to choose a term length

When choosing a term length for your life insurance, you should consider your financial responsibilities, such as your mortgage or children's education. Here are some factors to help you decide:

• The length of your mortgage: Your mortgage is likely a significant part of your monthly expenses and is often the main reason people buy life insurance. Consider how many years you have left on your mortgage payments when choosing a term length.
• How long until your children are financially independent: Children can be expensive, with costs for food, clothing, and education. Think about how long you will need to support your children financially and choose a term length that covers this period.
• The number of years until you retire: If you are buying term life insurance to replace your income, you may not need it after retirement. Consider choosing a term length that covers you until retirement when you will have savings to support yourself.
• Your age: The older you are, the shorter the term lengths you will qualify for. For example, people in their 70s may only be eligible for a 20-year term with most insurers.
• Your financial situation: If you have short-term financial obligations, such as a small loan or college fees, a shorter term length may be more suitable. On the other hand, if you have long-term financial responsibilities, such as a mortgage or large loans, a longer term length may be more appropriate.
• The cost of premiums: Longer term lengths typically result in higher premiums. Consider your budget and choose a term length with premiums that you can comfortably afford.
• The likelihood of future financial obligations: Choosing a longer term length can give you peace of mind that you will be covered if you take on more financial obligations in the future.

What happens when a term life insurance policy expires?

Term life insurance is a contract between a policyholder and an insurance company that provides a death benefit for a specified period. Once the term life insurance policy expires, the policyholder can either renew it for another term, convert it to permanent coverage, or let the policy lapse. If the policyholder chooses to renew the policy, the premiums will be recalculated based on their age at the time of renewal, resulting in higher rates.

When a term life insurance policy expires, the coverage ends, and the policyholder is no longer required to make premium payments. However, if the policy has a guaranteed renewal clause, they can renew it annually at a higher rate. This option may be valuable for those diagnosed with a terminal illness, making them otherwise uninsurable. Additionally, some insurers offer the option to convert term life insurance into permanent life insurance without requiring a new medical exam, although overall premiums will increase.

Term life insurance policies do not accumulate cash value and have no payout after the term expires. Therefore, if the policyholder outlives the policy, they do not receive any refund or return on their premium payments. The only exception is a "return of premium" policy, which refunds the premiums if the policyholder survives the term. However, these policies are significantly more expensive than regular term life insurance.

In summary, when a term life insurance policy expires, the policyholder has the option to renew it at a higher rate, convert it to permanent coverage, or let it lapse if they no longer require the insurance. The choice depends on the policyholder's financial situation, health status, and insurance needs at the time of expiration.

Can you cash out a term life insurance policy?

Term life insurance is designed to financially protect your loved ones in the event of your death. It provides a death benefit for a specified period, typically between 10 and 30 years, and if the insured person dies during this period, the insurance company pays out the benefit to the chosen beneficiaries. However, term life insurance does not accumulate a cash value over time, and thus, it cannot be cashed out.

Term life insurance policies differ from whole life insurance and other permanent policies in this aspect. While term life insurance solely provides a death benefit with no cash value component, permanent life insurance policies, such as universal and whole life policies, offer both a death benefit and a cash value account. This cash value can be accessed and withdrawn while the policyholder is still alive.

Although you cannot cash out a term life insurance policy, there are alternative options to consider if you need to make changes to your coverage. Here are some possible alternatives:

• Selling your term life insurance policy: You may have the option to sell your term life insurance policy to a third-party company through a life insurance settlement. However, it's important to keep in mind that you will sell the policy for less than the death benefit, and the buyer will receive the death benefit payout when you pass away.
• Adjusting your term life insurance coverage: If your premiums are no longer affordable, many insurance companies are willing to work with you to adjust your coverage level, resulting in lower premiums.
• Converting to a permanent life insurance policy: You may have the option to convert your term life insurance policy to a permanent policy, such as whole life, universal life, or variable universal life insurance. These policies build cash value, but it's important to note that your premium payments will increase.
• Cancelling your term life insurance policy: If you no longer need the coverage or want to eliminate the premium payments from your budget, you can choose to cancel your term life insurance policy. However, it's important to remember that you and your beneficiaries will not receive any benefits if you cancel the policy or let it lapse.

In summary, while you cannot cash out a term life insurance policy due to its nature of not accumulating cash value, there are alternative options available if you need to make changes to your coverage. These options include selling, adjusting, converting, or cancelling your policy. It's important to carefully consider your needs and consult with a financial professional before making any decisions regarding your life insurance coverage.

How long does term life insurance last?

Term life insurance is a type of insurance that provides a death benefit for a specified period of time, typically between 10 and 30 years. It is a contract between the policyholder and the insurance company, where the policyholder agrees to pay a premium for a specific term, and the insurance company promises to pay a death benefit to the policyholder's beneficiaries upon their death. The key features of term life insurance are that it is generally the cheapest way to buy life insurance, it has a specific length of time when rates are locked in, and there is no cash value in the policy.

The duration of a term life insurance policy can vary depending on the individual's needs and financial commitments. It is commonly available in lengths of 5, 10, 15, 20, 25, or 30 years, with some companies offering longer terms of up to 40 years. The most common term length purchased is 20 years. When choosing the right term length, it is important to consider factors such as the length of your mortgage, how long until your children are financially independent, and your expected retirement age.

At the end of the term, the policyholder can choose to renew the policy at a higher rate, purchase a new policy, convert it to permanent life insurance, or let the policy lapse if they no longer need it. Term life insurance does not usually build cash value, so there is no option to cash out the policy. Most term life insurance policies end after 10 to 30 years, but some allow for annual renewals up to a certain age, such as 80 or 90.

In summary, the length of a term life insurance policy depends on the individual's financial commitments and obligations. It is designed to provide coverage for a specific period, after which the policyholder can choose to renew, purchase a new policy, or convert to permanent life insurance. Term life insurance offers a cost-effective way to protect your loved ones financially in the event of your death.

Frequently asked questions