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Have you been thinking about getting life insurance? That’s great news!
Perhaps you read my guide to why you need life insurance – and realized life without it is a gamble. It certainly is – so you’re making the right choice.
Now, chances are you’re wondering which life insurance option is best for you – and that’s where I can help.
Term life insurance is one of the most common types – and unsurprisingly so. It has many pros, relatively few cons, and it provides a cost-effective way to guarantee a financial safety net for your family if anything happened to you.
So, what is term life insurance all about – and could it be the right insurance option for you? Read on to find out.
What is term life insurance?
Term life insurance is a policy with an end date, as the name suggests.
When you buy term life insurance, you are covered for a specific amount of time (say, 10, 20, or 30 years). This means that, if anything happened to you during that time, your beneficiaries would receive a payout.
However, when the term ends, your policy would expire – and if anything happened to you during that time, there would be no payout.
Term life insurance is also known as “pure life insurance” or “pure protection” because, unlike whole life insurance, its sole purpose is to protect your family and dependents if you die prematurely.
How does term life insurance work?
With most term life policies, your beneficiaries will receive a payout called the death benefit. The premium can stay the same throughout the term – but with some term life insurance policies, it could vary.
You decide how long you want the cover for, and the most common terms are 10, 20, or 30 years. Several of the best term life insurance companies offer non-standard term lengths like 18 or 22 years.
So, for example, if you purchase a 30-year term life insurance policy with $250,000 of coverage and die within 10 years, your family would receive the $250,000.
Term life insurance may be cheaper than you think
What deters many people from getting insured is the imagined cost of life insurance.
While whole life insurance can be quite expensive – term life insurance is most likely cheaper than you think.
Haven Life, backed by MassMutual, offers some of the the most affordable life insurance polices. If you’re a 25-year-old non-smoker, you could be paying less than $10 per month for $250,000 in life insurance coverage. This doesn’t increase much for a 30-year-old. Even a $500,000 policy can be purchased for less than $14 per month.
While the premiums become more expensive with age, when you’re young, they really won’t make you go broke, contrary to what many people think.
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What are the types of term life insurance?
There are quite a few different variations of term life insurance policies, but here are the most common types:
Level-Premium Term Policy
With a level-premium term policy, you’ll be making fixed payments for the duration of the term.
Your premiums won’t increase or decrease – which is great if you want to plan your budget long-term.
The death benefit will decrease throughout the period of the plan. Decreasing term insurance policy is meant for people who currently have a lot of financial responsibilities that are predicted to decrease over time (like mortgage or student loan debts).
As you may have guessed, an increasing term policy means that the death benefit your beneficiaries receive will increase each year you have the policy.
This, of course, means that the premium will also go up. There’s typically a specific limit for the increase, which is between 2% and 10% – meaning your premium will increase by about a similar amount.
A renewable policy allows you to renew or extend your policy for an additional term without a medical exam. This means you can continue with your policy even if your health gets worse, and you don’t have to requalify.
Bear in mind that initially, your premiums are likely to be higher than those of life insurance without the ability to renew.
With convertible policy, you have the right to convert your term life insurance into permanent life insurance (of equal value). Typically, there are no medical exam or underwriting standards to meet.
However, converting will likely increase your premiums – and usually, you can only convert your policy until you get to age 65.
How to find the best term life insurance
Finding the best term life insurance policy for you is important – and there are quite a few options to choose from. This means you’ll probably need to do a bit of research before you make up your mind.
Sites like Policygenius are great for comparing term life insurance quotes in one place. You won’t even need to call up anyone – all of it can be done online. Easy!
A few things to bear in mind when looking for the best term life insurance companies for you:
- Look for companies that have “Excellent” rating to guarantee the best experience; A.M. Best is the most well-known rating agency for insurers, so check out their ratings.
- Make sure the company you decide to go with is financially strong; this will reassure you that the insurer will be able to pay your beneficiaries.
- Make sure you know the insurer provides great customer service. You, or your beneficiaries, will have to deal with them for a long time – so make sure you go for a company that you know won’t give you problems.
- Be clear about the policy features you want. Don’t just go for something you’re unsure of – be certain your policy includes features that are necessary for you, like the right to convert to a whole life policy or any others.
Who is term life insurance best for?
Term life insurance is ideal for those who want the most affordable option, don’t mind the policy running out in the future, and don’t care about cash value.
Term life insurance will help cover expenses for your family rather than build any cash value – so if that’s what you’re after, choose term life insurance.
How much do I need?
While pinpointing the exact amount of life insurance you’ll need is challenging, there are ways you can get an estimate.
#1 Calculating How Much Life Insurance You Need
The best way to calculate how much life insurance you need is by taking your long-term financial obligations and then subtracting your assets. The gap that remains is what life insurance will need to fill.
You can calculate these by looking at your debts and income. If you have a mortgage or kids who you want to support through college, you’ll also need to estimate how much money you’ll need to cover those expenses.
Here’s how to calculate how much insurance you’ll need:
- Add up your debts (including your mortgage and funeral expenses);
- Decide how many years your family might need your support for – then multiply your annual income by that number. This should give you a reasonable estimate.
#2 Your Income x 10
An alternative way to calculate how much term insurance you need it is by multiplying your income by 10. It’s a little outdated because of the interest rates – but it could provide an estimate if you’re struggling to work out how much insurance you need otherwise.
If you go with the 10x income rule, you also won’t be considering your family’s needs – nor your savings or debts. So, generally, I’d advise to try and use the first method for a more accurate estimate.
Pros and Cons of Term Life Insurance
Term life insurance comes with many pros, and relatively few cons, making it one of the most popular insurance types on the market.
- It’s straightforward. Term insurance is the simplest life insurance option out there. It’s easy to understand; there are no hidden fees, risks, or exclusions.
- It’s affordable. While the price of premiums will depend on things like your medical history and lifestyle, generally it is the most cost-effective life insurance option.
- You choose your policy length. The good thing about term life insurance is that you get to decide how long you need insurance for, meaning it’s easy to get temporary coverage. For example, if you know you’ll be in debt for a set period, or you’ll be taking care of someone – you can buy term life insurance that covers you for the exact amount of time.
- It offers the best value. If you’re looking for the maximum payout (death benefit) for a minimum investment, term life insurance is the best option. There are no additional charges for extra features you may not need, so it offers the biggest value for money. The premium you’ll pay is likely to be much lower than what you’d pay for whole life insurance.
- Limited coverage. Unlike permanent life insurance, term life insurance only provides limited life coverage, and knowing exactly how long you’ll need coverage for can be tricky. You have to predict the future – and who can say confidently what’ll happen? For example, you might buy term life insurance for 20 years, and learn after those 20 years that you needed coverage for 10 more years. You’ll then be forced to purchase additional life insurance if you want to stay covered – and, if your health isn’t that great anymore, your premiums could skyrocket.
- No cash value – only life cover. Unlike permanent life insurance, you won’t be reaping any rewards of getting life insurance. There are no perks like investment component – it’s just an insurance policy.
Is term life insurance for you?
To sum up, term life insurance is a life insurance option without any bells and whistles – and that’s what I like about it. It’s simple, straightforward, and affordable.
It doesn’t come with an investment opportunity like whole life insurance – but you also won’t be incurring additional charges for any potentially unnecessary features.