Benefit Term Life Insurance: What's The Deal?

Term life insurance is a form of insurance that provides a death benefit for a specified period of time, typically between 10 and 30 years. If the insured person dies during the specified term, the insurance company pays out a death benefit to the policyholder's beneficiaries. Term life insurance is usually the most cost-effective option for those seeking death benefit protection for their family for a set number of years. It is particularly attractive to young people with children as it offers substantial coverage for a low cost.

How does term life insurance work?

Term life insurance is a contract between the policyholder and an insurance company. The policyholder agrees to pay a premium for a specific term, usually between 10 and 30 years, and in return, the insurance company promises to pay a death benefit to the beneficiaries upon the policyholder's death. The death benefit is usually income tax-free unless the premiums are paid with pre-tax dollars.

There is an application process for term life insurance, which includes a medical exam to evaluate the policyholder's health and determine their risk level. The insurance company will also consider the policyholder's occupation, lifestyle, and hobbies when assessing 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 taking out a term life insurance policy, the policyholder needs to choose the term length and decide on the death benefit amount. It is recommended to choose a term long enough to cover important life events, such as having children and paying off a mortgage. The longer the term, the higher the monthly premium. It is generally easier and more cost-effective to get insurance at a younger age and when in good health.

Term life insurance policies do not have a cash value component, and there is no payout if the policyholder outlives the term. However, some policies offer the option to convert to a permanent whole life policy, which provides lifetime coverage and accumulates cash value.

What are the different types of term life insurance?

Term life insurance provides a death benefit for a specified period, after which the policyholder can either renew it for another term, convert it to permanent coverage, or let the policy lapse. The best option depends on individual circumstances, but generally, most companies offer terms ranging from 10 to 30 years, with some offering terms of up to 40 years.

Level-Premium or Level-Term Policy

The most common type of term life insurance is level-premium or level-term insurance. This type of policy has a fixed monthly payment and a death benefit that remains the same for the duration of the policy. Most term life insurance policies are level-premium policies.

Yearly Renewable Term (YRT) Policy

Yearly renewable term (YRT) 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 they can become very expensive over time. However, they may be suitable for someone who only needs temporary insurance.

Decreasing Term Policy

Decreasing term policies have a death benefit that declines each year according to a set schedule. The policyholder pays a fixed premium for the duration of the policy. These policies are often used in conjunction with a mortgage, with the insurance payout decreasing alongside the declining principal of the home loan.

Return of Premium

With a "return of premium" feature, the policyholder may get back all or a portion of their premiums if they live to the end of the term. However, the premiums for this type of policy are usually much higher, and the benefit may only be paid if the policy remains in force until the end of the term.

Guaranteed Issue

Guaranteed issue policies do not require a medical exam and only ask a few simple health questions. These policies assume that the insured person has health issues, so the premiums are typically much higher. Additionally, the policy might not pay a full death benefit during the first few years of coverage.

Convertible Term Life Insurance

Convertible term life insurance allows the policyholder to convert their term policy into a permanent plan without undergoing a new underwriting process or medical exam. This provides flexibility for those who may want to extend their coverage and build cash value in the future, but it will result in higher premium payments.

How much does term life insurance cost?

Term life insurance is often chosen over permanent life insurance because it is more affordable. The cost of your term life insurance will depend on several factors, including your age, gender, health, lifestyle, and the length of the policy.

Term life insurance is a type of insurance that provides coverage for a certain period, such as 10, 20, or 30 years. It is considered a temporary policy and is more affordable than permanent life insurance. The cost of a term life insurance policy depends on various factors and can vary significantly among applicants, insurers, and policy types.

The average cost of a term life insurance premium is around $160 per year for a healthy 30-year-old, although this can be as low as $18 per month. A healthy 30-year-old woman can purchase a $20,000 term life insurance policy for less than $8 per month. For older people, term life insurance is still an affordable option. For example, a 55-year-old woman can purchase a $20,000 policy for around $25.50 per month.

The biggest factor impacting term life insurance premiums is age and gender. For example, a $50,000 policy for a healthy 25-year-old woman will cost approximately $14 per month, while the same policy for a 55-year-old woman would be $60 per month. Using the same example, a 25-year-old male would pay approximately $22.50, and a 55-year-old male would pay $86.50.

The length of the term selected will also determine the cost of a policy. A 10-year term policy will be less expensive than a 25-year policy due to the difference in the number of years of coverage. The amount of insurance purchased will also impact the cost, with a higher death benefit resulting in higher rates.

Factors Affecting the Cost of Term Life Insurance

Several factors can influence the cost of term life insurance, and these can be categorized into controllable and uncontrollable factors.

Uncontrollable Factors

• Age: Generally, younger people pay less for life insurance because they are less likely to have health problems. As you age, your life expectancy decreases, and the likelihood of your insurer having to pay out your policy increases, resulting in higher premiums.
• Gender: Women typically pay less than men of the same age and health because they have longer life expectancies.

Controllable Factors

• Smoking status: Life insurance for smokers tends to be more expensive due to the increased risk of developing health issues associated with smoking.
• Health: Insurers consider your height, weight, and medical history, especially any chronic or serious illnesses. Standard policies require a medical exam before determining your eligibility.
• Hobbies: Engaging in risky hobbies, such as skydiving, can result in higher premiums.
• Occupation: Occupations considered hazardous, such as police officers or firefighters, will result in higher premiums.

Cost-Saving Tips for Term Life Insurance

There are several ways to lower your term life insurance rates, mainly by maintaining a healthy lifestyle:

• Maintaining a healthy weight: Being overweight is linked to medical conditions with higher mortality rates, and staying within a healthy weight range can reduce your risk for insurers.
• Managing medical conditions: If you have an ongoing medical condition, ensure you follow your doctor's treatment plan.
• Discontinuing tobacco use: Tobacco use is associated with various medical conditions, and discontinuing its use can help lower your rates.
• Avoiding high-risk hobbies: Reducing your participation in high-risk activities can lead to lower premiums.
• Applying early: The cost of term life insurance increases with age, so applying earlier in life can result in lower rates.

While the cost of term life insurance depends on various factors, it is generally a more affordable option than permanent life insurance. By considering the length of the policy, the amount of coverage, and your personal circumstances, you can determine the cost of term life insurance that fits your needs and budget.

What are the benefits of term life insurance?

Term life insurance is a popular choice for those looking to save money upfront. It is the simplest, purest form of life insurance and is usually the least costly life insurance available. Here are some of the benefits of term life insurance:

Low cost

Term life insurance is the most cost-effective way to provide death benefit protection for your family for a set number of years. The cost of this coverage type is usually low, and you can choose the term length that suits you best. If planned correctly, a term policy may save you money upfront and provide your family with ample security.

Flexibility

Term life insurance is attractive to young people with children. Parents can obtain substantial coverage for a low cost, and if the insured dies while the policy is in effect, the family can rely on the death benefit to replace lost income. These policies are also well-suited for people with growing families. They can maintain the coverage needed until, for example, their children reach adulthood and become self-sufficient.

Fixed premiums

Most term life policies have level premiums, meaning your monthly premium stays the same for the entire term of the policy. This makes it easier to plan and budget for the future.

Tax-free death benefit

Your loved ones receive the death benefit tax-free when you die, offering you a way to leave behind a legacy. This cash benefit can be used by beneficiaries to settle healthcare and funeral costs, consumer debt, mortgage debt, and other expenses.

Convertibility

Many term life insurance policies allow you to convert to a permanent life insurance policy with no additional medical exam. This can be useful if your circumstances change and you decide you need lifelong coverage.

How does term life insurance compare to whole life insurance?

Term life insurance and whole life insurance are two of the most common types of life insurance available. While both types of insurance offer a death benefit, there are several differences between the two.

Term Life Insurance

Term life insurance offers coverage for a specific period, typically between 10 and 30 years. The premiums for term life insurance are generally lower than those of whole life insurance, making it a more affordable option for individuals and families. Term life insurance is also simpler to understand, as it does not include a savings or investment component. However, term life insurance does not accrue any cash value, and the coverage ends once the term is over.

Whole Life Insurance

Whole life insurance, on the other hand, provides lifelong coverage as long as the policyholder continues to pay the premiums. One of the key features of whole life insurance is the cash value component, which grows over time, tax-free, and can be withdrawn or borrowed against by the policyholder. This makes whole life insurance a more complex and flexible financial tool. However, the premiums for whole life insurance are significantly higher than those of term life insurance, and the death benefit may be reduced if the policyholder borrows against the cash value.

Comparison

When choosing between term and whole life insurance, it is important to consider your specific needs and financial situation. Term life insurance is generally recommended for individuals who only need coverage for a certain period, such as while they have dependent children or a mortgage. Whole life insurance, on the other hand, is suitable for those who require lifelong coverage, want to build cash value, or have lifelong dependents. Additionally, term life insurance may be preferred for those who want a simple and straightforward insurance policy, while whole life insurance offers more flexibility and features.

Frequently asked questions