Life insurance is an important piece of one’s overall financial plan. This is because the proceeds from a life insurance policy can be used to ensure that loved ones and other dependents do not face financial hardship in the case of the insured’s passing.
Throughout the years, the life insurance industry has grown a great deal – and with that growth has come the emergence of many different types of policies. Today, there are life insurance policies that are designed to fit a variety of different needs. These policies are divided into two key categories – term and permanent.
What is Term Life Insurance?
Term life insurance is the most basic form of all life insurance policies. This is because term life insurance offers only death benefit coverage, without any type of cash value or investment component.
As its name implies, term life insurance is purchased for a set period of time, or “term.” Typically, these time periods are ten years, fifteen years, twenty years, or even thirty years. Many insurance companies will also offer a one-year renewable term life option.
Term life policies have lower premiums than permanent policies with the same amount of coverage. This is especially the case for insureds who are young and in good health at the time of application.
The lower premium is due in large part to the fact that the premium payment is going only towards the death benefit coverage and not into a cash or savings component. Therefore, some of the primary characteristics of term life insurance include “temporary” protection, low cost, and no cash value build-up.
How Term Life Insurance Works
Once the “term” of coverage has elapsed, the insured may need to renew his or her policy to continue coverage. At that time, it is likely that the new premium will be higher, based on the insured’s older age (as well as any potential health issues that they may have developed).
Today, there are many term life insurance policies that can be converted to permanent life insurance – and frequently, this can be done without the insured having to take a medical exam, or even prove evidence of insurability.
Should the insured pass away while the policy is in force, the amount of the death benefit will be paid out to the named beneficiary (or beneficiaries, if there are more than just one). These proceeds are received free of income taxation, which can allow the beneficiary to make use of the full dollar amount.
Term versus Permanent Life Insurance Policies
There are two primary classes of life insurance. These include term and permanent coverage. With term life insurance, only a death benefit is provided to a named beneficiary upon the insured’s death. Because it is considered “plain vanilla” coverage, term life insurance can typically be purchased inexpensively – especially for those who are young and in good health.
Permanent life insurance offers death benefit coverage, along with a cash value or investment component. There are several sub-classes of permanent life insurance, including whole life, universal life, and variable life.
The premiums on permanent life insurance policies are typically higher than those of term life coverage. However, this is primarily due to the fact that a portion of each premium is going towards the cash or investment component of the permanent policy.
Types of Term Life Insurance Available
Even though term life insurance is considered to be a “basic” form of coverage, there are many different types of term life insurance policies. These include the following:
- Level Term – With a level term life insurance policy, the amount of the death benefit coverage will remain the same throughout the entire life of the policy. The amount of the premium will also typically remain fixed.
- Renewable Term – A renewable term life insurance policy can be renewed by the policyholder after each time period, or term. Typically, there is no need to fill out a new application or to take a medical examination to qualify.
- Convertible Term – With a convertible term life insurance policy, the term coverage may be converted over to a permanent form of life insurance protection. Usually, this can be done without the need to undergo a medical examination.
- Increasing Term – With an increasing term life insurance policy, the amount of death benefit coverage will rise over time. The amount of the premium, however, will oftentimes stay the same throughout the life of the policy.
- Decreasing Term – Conversely, a decreasing term policy will have coverage that goes down, while the amount of the premium typically stays the same. This type of term life insurance coverage may be a good option for those who want to ensure that the remaining balance of a mortgage is paid should the insured pass away.
- Reentry Term – Insurance companies will oftentimes charge low premiums during the first several years of a term life insurance policy. One reason for this is because, on average, an insured will usually remain in good health for these years. But, over time, some insureds who are in good health will cancel their coverage, while others who are not in good health will keep their policy. Therefore, in order offset this, insurance companies will often build additional renewal premium charges into a term life insurance policy during its later years. Therefore, some insurance carriers offer reentry term life insurance plans. Here, provided that an insured continues to show evidence of insurability at various intervals, their renewal premiums will remain comparable to the premiums that are charged for newly issued term life insurance policies.
- Credit Life Insurance – Another type of life insurance coverage that is oftentimes issued as term coverage is credit life. This type of coverage is designed for paying off an individual’s debt – such as their credit card – if he or she should pass away while they still owe a balance. Having credit life can help to protect a debtor’s loved ones so that they are not burdened with having to pay it off.
How Much Does Term Life Insurance Coverage Cost
While term life insurance will oftentimes cost less than a permanent life insurance policy (with all other factors being equal), there are a number of components that will come into play when determining how much a policy’s premium will be. These can include:
- Amount of Death Benefit Protection – The amount of the death benefit is a key factor in the premium price of term life insurance policies. Here, the larger the amount of coverage, the more the premium will usually be.
- Length of Coverage – The time frame that is chosen for the term coverage will also have an impact on the premium. In this case, the longer the time period – and thus, the guarantee of coverage – the higher the premium price.
- Age of the Applicant / Insured – When it comes to life insurance, it is typically better to apply sooner rather than later. This is because younger age usually equates to a longer life expectancy, and in turn, a lower premium.
- Health of the Applicant / Insured – Health condition also plays a role in the premium price of life insurance. Here, those who are in better health will typically pay less.
- Smoker / Non-Smoker Status of the Applicant – Smoking status is another of the primary factors in the price of life insurance. Those who are smokers can often end up paying two-to-three times more than those who are non-smokers.
- Offering Insurance Company – Even with all factors being equal, the company that is offering the life insurance policy can play a role in the amount of its premium price. With that in mind, it can pay to shop around before choosing a term life insurance policy to purchase.
Should You Consider Term Life Coverage?
Although term life insurance may not be the solution for everyone, there are some circumstances that could make this type of coverage right for you. These may include the following:
- You need coverage, but do not have a lot to spend on premium
- You only need coverage for a set period, such as for the payoff of a 20 or 30-year mortgage balance
How to Get the Best Premium Rates on Term Life Insurance Protection
Just as with any other product or service, getting the best premium rates on term life insurance protection can be a factor in your overall purchasing decision. To get an unbiased look at different term life policies and their cost, working with an independent life insurance brokerage can be beneficial.
If you are ready to move forward with term life coverage, we can help. To get started, just simply fill out the quote form on this page.