Term Life Insurance

Life insurance is an important piece of one’s overall financial plan. This is because the proceeds from a life insurance policy can help ensure that loved ones and other dependents do not face financial hardship in the event of the insured’s passing.

Over the years, the life insurance industry has grown significantly, and with that growth has come the emergence of many different types of policies. Today, there are life insurance policies designed to fit a variety of 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 life insurance. 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 10, 15, 20, or even 30 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 coverage amount. 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 goes only toward the death benefit coverage, 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 their policy to continue coverage. At that time, the new premium is likely to be higher, given the insured’s older age (as well as any potential health issues 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 provide evidence of insurability.

Should the insured pass away while the policy is in force, the death benefit will be paid to the named beneficiary (or beneficiaries, if there is more than one). These proceeds are received free of income tax, which allows the beneficiary to use 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 because a portion of each premium goes toward 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 premium amount will also typically remain fixed.
• Renewable Term – A renewable term life insurance policy can be renewed by the policyholder after each term period. 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 undergoing a medical examination.
• Increasing Term – With an increasing term life insurance policy, the death benefit will increase over time. The premium amount, however, will often remain the same throughout the policy’s term.
• Decreasing Term – Conversely, a decreasing term policy has coverage that decreases, while 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 mortgage balance is paid if the insured passes 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 that, on average, an insured will usually remain in good health for these years. But over time, some insureds in good health will cancel their coverage, while others in poor health will keep their policies. Therefore, in order to 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 demonstrate insurability at various intervals, their renewal premiums will remain comparable to those charged for newly issued term life insurance policies.
• Credit Life Insurance – Another type of life insurance coverage, often issued as term coverage. This type of coverage is designed to pay off an individual’s debt, such as a credit card balance, if he or she passes away while still owing. 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 often cost less than a permanent life insurance policy (with all other factors being equal), several factors come into play when determining a policy’s premium. These can include:

• Amount of Death Benefit Protection – The death benefit amount is a key factor in the premium for term life insurance policies. Here, the more coverage you have, the higher the premium will usually be.
• Length of Coverage – The chosen term coverage will also affect 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 primary factor in life insurance pricing. 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 offering the life insurance policy can affect the premium amount. With that in mind, it can pay to shop around before purchasing a term life insurance policy.

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 premiums
• 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’re ready to move forward with term life coverage, compare quotes from top life insurance companies to find the right policy for your needs.

Meet the Author

Ryan Guina

Ryan Guina is The Military Wallet's founder. He is a writer, small business owner, and entrepreneur. He served over six years on active duty in the USAF and is a current member of the Tennessee Air...

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