Term Life Insurance
Have you been thinking about getting life insurance? That’s great!
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.
Term has many pros, relatively few cons, and it provides a cost-effective way to create a financial safety net for your family in case you died unexpectedly.
So, what is term life insurance all about – and could it be the right insurance option for you? Let’s 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, your policy lasts a specific amount of time — 10, 20, or 30 years in most cases. If you died during that time, your beneficiaries would receive a payout.
However, when the term ends, your coverage ends, too – and if anything happened to you after your term expired, there would be no payout.
Term life insurance is also known as “pure life insurance” or “pure protection” because, unlike whole life insurance, term’s sole purpose is to protect your family and dependents if you died prematurely.
How Does Term Life Insurance Work?
With most term life policies, your beneficiaries would receive a payout called the death benefit if you died. Usually, you’d pay the same premium throughout the term. In some cases, premiums can vary.
You decide how long you want the coverage to last, 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 buy a 30-year term life insurance policy with $250,000 of coverage and you died within 10 years, your family would receive the $250,000.
They could use the money to pay off debts, including the mortgage, to cover living expenses, or to plan for the future. The money would be tax-free, too.
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 gradually as the term progresses. Decreasing term insurance works well if you expect your financial responsibilities to decrease; if you’ll have the house or the student loans paid off soon, for example.
As you may have guessed, an increasing term policy’s death benefit increases as time passes.
This, of course, means that the premium will also go up. There’s typically a specific limit for the increase — which is between 2 percent and 10 percent – meaning your premium will increase by a similar amount.
A renewable policy allows you to renew or extend your policy for an additional term without getting another 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 coverage, 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 convert your policy only until you get to age 65.
Who is Term Life Insurance Best For?
Term life insurance is ideal for those who want the most affordable option, who don’t mind the policy running out in the future, and who don’t care about having a policy with its own 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 Term Life Coverage Do I Need?
While pinpointing the exact amount of life insurance you’ll need is challenging, there are ways you can get an estimate.
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 – then multiply your annual income by that number. This should give you a reasonable estimate.
Your Income x 10
Here’s an easier method: Multiply your annual income by 10. This idea is a little outdated because of today’s lower interest rates – but it could provide an estimate if you’re struggling to work out how much insurance you need.
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 using the first method for a more accurate estimate.
Pros and Cons
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.
- It’s affordable. While the price of premiums will depend on things like your medical history and lifestyle, term is almost always 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 the insurance, meaning you could 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 for that 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. 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 only 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 need to buy 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 an investment component – it’s just an insurance policy.
Is Term Life Insurance Right for You?
Term is life insurance 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.
For millennials — especially millennials with lots of debt and a growing family — term life provides an affordable way to protect your family.