Term life insurance, also known as pure life insurance, is a type of life insurance that guarantees payment of a stated death benefit if the covered person dies during a specified term. Once the term expires, the policyholder can either renew it for another term, convert the policy to permanent coverage, or allow the term life insurance policy to terminate. Term life insurance is often the most affordable life insurance policy available.
HOW DOES IT WORK?
A term life policy is a coverage for a specific term or length of time, typically between 10 and 30 years. It is designed solely to give your beneficiaries a payout if you die during the term.
Most individual term policies have level premiums, so you pay the same amount every month. When the term expires, there is no more coverage – you either have to go without or get a new policy, which will likely come at a higher cost – the older you are, the more expensive it is to get a policy. But, many insurance carriers will allow you to convert a term policy to permanent life insurance for part or all of the coverage period.
When you buy a term life insurance policy, the insurance company determines the premiums based on the policy’s value and your age, gender, and health. In some cases, a medical exam may be required.
If you die during the time policy is active, the insurer will pay the policy’s face value to your beneficiaries. This cash benefit may be used by beneficiaries to settle your healthcare and funeral costs, or some other expenses. However, if the policy expires before your death, there is no payout. You only may be able to renew a term policy at its expiration.
EXAMPLE OF TERM LIFE INSURANCE
Thirty-year-old Meredith wants to protect her family in the unlikely event of his early death. She buys a $500,000 10-year term life insurance policy with a premium of $50 per month. If Meredith dies within the 10-year term, the policy will pay Meredith’s beneficiary $500,000. If she dies after she turns 40, when the policy has expired, her beneficiary will receive no benefit. If she renews the policy, the premiums will be higher than her initial policy because they will be based on his age of 40 instead of age 30.
TERM LIFE INSURANCE TYPES
There are three different types of term life insurance – Level Term policies, Yearly Renewable Term (YRT) Policies and Decreasing Term policies. The best option will depend on individual circumstances.
LEVEL TERM POLICIES
These policies provide coverage for a specified period ranging from 10 to 30 years. Both the death benefit and premium are fixed. Because actuaries must account for the increasing costs of insurance over the life of the policy’s effectiveness, the premium is comparatively higher than yearly renewable term life insurance.
YEARLY RENEWABLE TERM
Yearly renewable term (YRT) policies have no specified term but can be renewed each year without providing evidence of insurability. The premiums change from year to year; as the insured person ages, the premiums increase. Although there is no specified term, premiums can become prohibitively expensive as individuals age, making the policy an unattractive choice for many.
DECREASING TERM POLICIES
These policies have a death benefit that declines each year, according to a predetermined schedule. The policyholder pays a fixed, level premium for the duration of the policy. Decreasing term policies are often used in concert with a mortgage to match the coverage with the declining principal of the home loan.
TERM LIFE INSURANCE COSTS
The cost of term life insurance depends on your age, health, and risk factors, plus the value of the death benefit and if you have opted for add-ons. If you have a group policy, however, the cost will be based on these factors for the group rather than yourself.
In general, the higher the death benefit, the higher your premium will be. Men also tend to pay more for life insurance than women. However, the overall costs of term life insurance may be lower than you expect.