Life Term Insurance: What You Need To Know

Life term insurance is a type of insurance that provides coverage for a set period, usually 10, 20, or 30 years. During this period, the policyholder pays a premium, and if they die during the term, their beneficiary will receive a death benefit. Term life insurance is typically more cost-effective than permanent life insurance, but it does not provide lifetime coverage or build cash value. The primary use of term life insurance is to provide coverage for financial responsibilities, such as consumer debt, dependent care, funeral costs, and mortgages. When choosing a term life insurance policy, individuals can select the term length that best suits their needs and budget.

How does a term life insurance policy work?

Term life insurance is a contract between an individual and an insurance company. The individual agrees to pay a premium for a specific term, and in return, the insurance company promises to pay a specific death benefit to the individual's chosen beneficiary upon their death. The term is typically between 10 and 30 years, and the death benefit is usually income tax-free.

There is an application process for term life insurance, which includes a medical exam to evaluate the individual's health and determine their risk level. The insurance company will also consider the individual's occupation, lifestyle, and hobbies when assessing their risk level and determining the premium. Certain hobbies, such as scuba diving, and dangerous occupational environments, such as working on an oil rig, may result in higher rates.

When choosing a term life insurance policy, it is important to consider the length of coverage needed. If the individual has children, it is often recommended to choose a term long enough to see them through college. The longer the term, the higher the monthly premium for a given coverage amount. However, it is generally easier and more cost-effective to obtain insurance at a younger age and when in good health.

In addition to choosing the term length, the individual must also decide on the desired death benefit amount. It is important to consider the financial needs of the individual's family or beneficiaries if the individual is no longer able to support them. The death benefit can be scaled up or down with increasing and decreasing term policies, respectively.

Term life insurance policies do not have a cash value component and do not provide a payout if the policy term expires before the individual's death. However, most term life policies allow for conversion to permanent life insurance, such as whole life or universal life insurance, which offers lifelong coverage and a cash value component.

What are the different types of term policies?

Term life insurance provides coverage for a set period, usually between 10 and 30 years, and is often contrasted with whole life insurance, which requires payments for the policyholder's entire life. Term life insurance is usually the most cost-effective option and is the simplest, purest form of life insurance.

There are several types of term life insurance policies, including:

Level Term or Level-Premium Policy

The most common type of term life insurance, level-premium insurance, has a fixed monthly payment for the life of the policy. The death benefit also remains static. This type of policy is usually offered in terms of 10, 15, 20, or 30 years. While the premium remains the same, it is comparatively higher than yearly renewable term life insurance due to the increasing costs of insurance over time.

Yearly Renewable Term (YRT) Policy

Yearly renewable term policies are one-year policies that can be renewed annually without providing evidence of insurability. The premiums increase each year as the insured person ages, and while this type of policy may be suitable for someone who needs temporary coverage, the premiums can become prohibitively expensive over time.

Decreasing Term Policy

Decreasing term policies have a death benefit that declines each year according to a predetermined schedule. The policyholder pays a fixed premium for the duration of the policy. This type of insurance is often used in conjunction with a mortgage, with the policyholder matching the insurance payout to the declining principal of the home loan.

Return of Premium Term Life Insurance

This type of term life insurance policy actually pays back all or a portion of the premiums if the insured person lives to the end of the term. However, the premiums are usually much higher than those of a level term policy.

Guaranteed Issue Insurance

Guaranteed issue insurance policies are easier to obtain because they don't require a medical exam and ask only a few simple health questions. However, this means that the insurance company assumes the policyholder is a risky prospect, so the premiums are typically much higher than other policy types.

Renewable Term Insurance

Renewable term plans give the policyholder the right to renew for another period when the term ends, regardless of their health. The premium increases with each new term, but the ability to renew without evidence of insurability is an important advantage. Without this, the policyholder risks deteriorating health, which may make it difficult or impossible to obtain a new policy.

Convertible Term Insurance

Convertible term policies often permit the policyholder to exchange the policy for a permanent plan. This option must be exercised during the conversion period, which varies depending on the type of term policy purchased. The premium rate on conversion is usually based on the policyholder's age on the conversion date.

How much term life insurance coverage do you need?

Term life insurance is a type of life insurance that provides coverage for a set period, typically between 10 and 30 years. During this period, the policyholder pays a fixed premium, and if they die during the term, their beneficiary will receive a death benefit. The amount of coverage, or death benefit, that you need depends on several factors, including your financial goals, family situation, income, debts, and existing assets.

The 10x Income Rule

This is a simple rule of thumb where you multiply your annual income by 10 to get the coverage amount. For example, if you earn $50,000 per year, you would need $500,000 in coverage. However, this rule does not take into account your specific expenses, savings, or existing life insurance policies.

The 10x Income Rule Plus College Expenses

This formula builds on the previous one by adding an additional $100,000 per child to cover their college expenses. So, using the previous example, if you have two children, you would need $700,000 in coverage ($500,000 x 10 + $100,000 x 2).

The DIME Method

DIME stands for Debt, Income, Mortgage, and Education. This method takes a more detailed look at your finances and encourages you to add up these four areas:

• Debt: Include all your debts, such as credit card debt, student loans, car loans, and personal loans.
• Income: Decide for how many years your family would need financial support and multiply your annual income by that number.
• Mortgage: Calculate the remaining amount you need to pay off your mortgage.
• Education: Estimate the cost of sending your children to school and college.

By adding up these four categories, you can get a more comprehensive view of your financial obligations. However, this method does not take into account your existing savings, investments, or life insurance coverage.

Income Replacement Plus Cushion

This method involves calculating the amount of coverage needed to replace your income and provide a cushion for inflation and other unexpected costs. To do this, divide your annual income by a conservative rate of return, such as 4% or 5%. For example, if your income is $50,000 and you estimate a 5% rate of return, you would need a $1,000,000 policy ($50,000 / 0.05 = $1,000,000). This would allow your beneficiaries to generate $50,000 in annual income while also having a sum left over for other goals like college tuition or retirement.

Life Insurance Calculators

You can also use online life insurance calculators, which take into account various factors such as income, debts, future expenses, and existing assets to provide you with an estimate of the coverage amount needed.

It's important to note that the amount of term life insurance coverage you need may change over time as your financial situation, family dynamics, and goals evolve. It's always a good idea to periodically review and adjust your coverage as needed.

How much does term life insurance cost?

Term life insurance is the simplest form of life insurance. You pay a premium for a set period, typically between 10 and 30 years, and if you die during that time, a death benefit is paid to your beneficiaries. Term life insurance is usually more cost-effective than permanent whole life insurance, but it has no cash value, no payout after the term expires, and no value other than the death benefit.

The cost of term life insurance depends on several factors, with age and gender being the most significant influences. The younger and healthier you are, the cheaper your premiums. Insurers classify applicants as super preferred, preferred, or standard, with super preferred being the healthiest category. They then calculate premiums based on your risk class. Other factors that affect the cost of term life insurance include:

• Your smoking status. Smokers pay more for life insurance due to the higher risk of developing health issues.
• Your health, including any pre-existing conditions, blood pressure, and cholesterol levels.
• Your family medical history.
• Your driving record.
• Your occupation and lifestyle. Hazardous jobs and risky activities like skydiving can increase your premium.

The length of the term and the amount of coverage will also impact the cost. Longer terms and higher coverage result in higher premiums. On average, a healthy 30-year-old can expect to pay around $160 per year for a term life insurance premium. For example, a $50,000 policy for a healthy 25-year-old woman will cost approximately $14 a month, while the same policy for a 55-year-old woman will be around $60 a month.

Term life insurance is considered a temporary policy and is generally more affordable than permanent life insurance. It is a good option for those looking to save money upfront, as the premiums are usually low, and you can choose the term length that suits your needs.

Where can you get term life insurance?

Term life insurance is a type of insurance that provides coverage for a set period, typically between 10 and 30 years. It is often chosen by those looking to save money upfront as it is usually more affordable than whole life insurance.

There are several companies that offer term life insurance, and many of them can be found and compared online. Here are some of the companies that provide term life insurance:

• Guardian Life: Offers term life policies in a range of term lengths and also provides coverage for people living with pre-existing conditions, such as HIV.
• MassMutual: Offers standard term life insurance, an annual renewable policy, and free coverage for low-income parents under its LifeBridge program.
• Northwestern Mutual: Received fewer complaints relative to its size than other insurers, making it a good choice for those prioritising customer experience.
• Thrivent: A fraternal benefit organisation that offers term and permanent life insurance to Christian consumers.
• New York Life: Offers two term products, including a policy that can be renewed annually.
• Pacific Life: Provides term life insurance that can be converted to permanent coverage, with a cash credit for those who make the switch.
• Penn Mutual: Caters to a wide range of policyholders with high customer satisfaction and a diverse policy lineup.
• AARP: Offers term life insurance to its members aged 50 to 74 and their spouses aged 45 to 74 through its partnership with New York Life.
• Aflac: Offers competitive and reliable plans, with term lengths of 10, 20, or 30 years.
• Fidelity: Provides term life insurance with a simple application process and a range of term lengths and amounts.

These companies can be a great starting point for those looking to purchase term life insurance. It is always a good idea to compare multiple companies, considering factors such as financial strength, customer reviews, and the specific terms and conditions of their policies.

Frequently asked questions