Term Life Insurance: Primary Policy Basics

Life insurance is a type of insurance that provides payment to a designated beneficiary after the policyholder's death. The primary beneficiary is the person who will receive the policy benefits upon the death of the insured. You may select one beneficiary, such as a spouse, or have multiple beneficiaries. If the primary beneficiary is no longer living at the time of the insured's death, the contingent beneficiary will receive the death benefit.

Who is the primary insured?

The insured is the person who is covered by a life insurance policy. In the case of term life insurance, the insured is covered for a specific period, known as the "term". If the insured person passes away during this term, the insurance company pays out a death benefit to the beneficiaries listed on the policy.

The primary insured, therefore, is the person who is the main income earner in their household. Term life insurance is intended to replace lost income, helping to maintain the family's standard of living and cover essential expenses such as utilities, groceries, and healthcare if the primary insured passes away.

The primary insured is typically the person who owns the policy and pays the premiums. However, it is also possible to have a policy where the owner and the insured are different people.

The primary insured can choose the term of their policy, usually available in lengths of 10, 15, 20, or 30 years, and the coverage amount or death benefit. The primary insured can also decide to add beneficiaries to their policy or change them at any time by contacting the life insurance company. Most term life insurance policies allow the primary insured to convert to a permanent life insurance policy without an additional medical exam.

How long does term life insurance last?

Term life insurance policies typically last for a set period of time, such as 10, 15, 20, or 30 years. The duration of the policy is chosen by the policyholder based on their financial responsibilities and needs. For example, a 20-year term life insurance policy may be suitable for new parents or newlyweds, while a 30-year term life insurance policy can help cover long-term financial obligations such as a mortgage.

Term life insurance policies are often the most affordable option for those seeking life insurance. The premium, or cost of the policy, is typically level, meaning it stays the same for the duration of the policy. The premium is based on factors such as the policyholder's age, health, lifestyle, and occupation.

At the end of the term life insurance policy, the policyholder can choose to renew the policy, convert it to a permanent life insurance policy, or allow the policy to lapse. If the policy is renewed, the premium will be recalculated based on the policyholder's current age and will be higher than the original premium.

When choosing the term length of a life insurance policy, it is important to consider financial commitments such as the length of a mortgage, the number of years until children are financially independent, and the number of years until retirement. By selecting a term length that covers these financial obligations, policyholders can ensure their loved ones will be financially protected.

What is the death benefit?

The death benefit is the payout your beneficiaries receive after your death if your policy is still in force. The death benefit is the defining aspect of a life insurance policy and the primary reason to get life insurance. It is the sum of money that the insurance company pays to beneficiaries when the insured passes away.

The death benefit can be paid out as a lump sum or in instalments. The beneficiary can use the money in any way they want, be it living expenses, education, retirement savings, or even going on vacation. The death benefit is usually income tax-free. However, it is recommended that the beneficiary consult a tax advisor.

The size of the death benefit depends on how much the policyholder wants to leave to their loved ones and how much they can afford to spend per month on the policy. The death benefit can remain level or increase over time. A level death benefit stays the same regardless of how long the policy is in force. An increasing death benefit can grow over time, but this may also lead to an increase in the cost of the insurance plan.

The death benefit can be used to pay off the deceased's debts, including healthcare and funeral costs, consumer debt, and mortgage debt. However, beneficiaries are not required to use the insurance proceeds to settle these debts.

How much does it cost?

The cost of term life insurance depends on several factors, including age, health, gender, and lifestyle choices. Here is a detailed breakdown of the costs associated with term life insurance and how these factors can influence the price.

Age

Age is a significant factor in determining the cost of term life insurance. Younger individuals with a longer life expectancy tend to pay lower premiums than older individuals. The cost of insurance generally increases with age, as the risk of death is higher for older individuals.

Health

Many insurers require a medical exam to assess the policyholder's health. Individuals with health issues, such as diabetes, heart disease, or high blood pressure, may have to pay higher premiums. Family medical history can also impact the cost of insurance, with insurers considering the presence of serious illnesses or diseases in the family.

Gender

Gender plays a role in determining life insurance rates due to differences in life expectancy. Since women generally have a longer life expectancy than men, they often pay lower insurance rates.

Lifestyle Choices

Certain lifestyle choices and habits can influence the cost of term life insurance. For example, smoking is considered a high-risk factor and can lead to higher premiums due to the associated health risks. Similarly, participation in hazardous hobbies, such as skydiving, or working in dangerous occupations, such as construction, may result in higher insurance rates.

Coverage Amount

The amount of coverage chosen will also affect the cost of term life insurance. A higher coverage amount will generally lead to higher premiums. For example, a $1 million coverage policy will have higher premiums than a $500,000 policy.

Term Length

The length of the term can also impact the cost. Longer-term policies, such as those lasting 20 or 30 years, often have higher monthly premiums than shorter-term policies. However, it is worth noting that the overall cost of two consecutive 10-year policies may be higher than a single 20-year policy due to increasing rates with age.

Additional Factors

Other factors that may influence the cost of term life insurance include weight, driving record, occupation, and financial history. Maintaining a healthy weight, avoiding risky activities, and having a good financial history can help keep insurance rates lower.

In summary, the cost of term life insurance varies depending on a range of factors, and it is important to consider these factors when choosing a policy that fits your needs and budget. It is always a good idea to get quotes from multiple insurers to compare rates and find the most suitable option.

What are the pros and cons?

Term life insurance is a type of life insurance policy that provides coverage for a specified period or term. This term can range from one to thirty years. If the insured person dies within this period, the policy pays a death benefit to the beneficiaries. Here are some pros and cons of term life insurance:

Pros:

• Affordability: Term life insurance policies generally have lower premiums than whole life insurance, making it a cost-effective option for individuals seeking substantial coverage.
• Simplicity: Term life insurance is straightforward, without complex investment components or cash value accumulation. The policyholder pays regular premiums for a specified term, and their beneficiaries receive the death benefit if they pass away during this period.
• Flexibility: Term life insurance policies offer flexibility in terms, ranging from one to thirty years. This allows individuals to choose a policy term that aligns with their financial responsibilities, such as paying off a mortgage or funding children's education.
• Convertibility: Many term life insurance policies offer the option to convert to a whole life insurance policy without a medical examination. This is beneficial if an individual's financial situation changes or they develop health issues later in life.
• High coverage amounts: Term life insurance policies typically offer higher coverage amounts compared to other types of life insurance, ensuring adequate financial support for beneficiaries.

Cons:

• No cash value: Term life insurance does not build cash value, unlike whole life insurance, which has a savings component. There are no investment returns or cash value to borrow against or withdraw from.
• Temporary coverage: Term life insurance coverage is limited to the term of the policy. Once the term expires, the policyholder must renew or seek a new policy, usually at a higher premium.
• Premium increases with age: If a policyholder renews their term life insurance policy, premiums typically increase with age, making it challenging for older individuals to maintain coverage.
• Potential for no payout: If the policyholder survives the term, the beneficiaries may not receive any payout, and the premiums paid do not result in any financial return.
• Limited options for health changes: While term life insurance policies offer conversion options, these may come with restrictions and higher costs. Obtaining new coverage or affordable renewal options may become challenging if a policyholder's health deteriorates significantly.

Frequently asked questions