Term Life Insurance

Term life insurance, also known as pure life insurance, is a type of life insurance that guarantees the payment of a predetermined death benefit if the insured person dies during a predetermined term. When the term expires, the policyholder has the option of renewing the policy for another term, converting the policy to permanent coverage, or allowing the term life insurance policy to expire.

How Term Life Insurance Works

When you purchase a term life insurance policy, the insurance company calculates your premiums based on the policy's value (the payout amount) as well as your age, gender, and health. A medical exam may be required in some cases. Your driving record, current medications, smoking status, occupation, hobbies, and family history may also be questioned by the insurance company.

If you die during the policy term, the insurer will pay your beneficiaries the face value of the policy. Beneficiaries may use this cash benefit, which is usually not taxable, to pay for your healthcare and funeral expenses, consumer debt, or mortgage debt, among other things. However, there is no payout if the policy expires before your death. You may be able to renew a term policy when it expires, but the premiums will be recalculated for your age.

Other than the guaranteed death benefit, term life insurance policies have no value. There is no savings component, as there is with whole life insurance.

Term life insurance is typically the least expensive type of life insurance available because it provides a benefit for a limited time and only a death benefit. A healthy 35-year-old nonsmoker, for example, can typically obtain a 20-year level-premium policy with a face value of $250,000 for $20 to $30 per month.

Purchasing a whole life equivalent would have significantly higher premiums, possibly $200 to $300 per month or more, depending on the issuer. Because most term life insurance policies expire before paying out a death benefit, the insurer's overall risk is lower than with a permanent life policy. Because of the lower risk, insurers can pass on cost savings to customers in the form of lower premiums.

Interest rates, the insurance company's financials, and state regulations can all have an impact on premiums. Companies frequently provide better rates at "breakpoint" coverage levels of $100,000, $250,000, $500,000, and $1,000,000.

Top-Rated Term Life Insurance Companies

Example of Term Life Insurance

Thirty-year-old George wishes to safeguard his family in the unlikely event of his premature death. He purchases a $500,000 10-year term life insurance policy with a monthly premium of $50. If George dies within the policy's 10-year term, his beneficiary will receive $500,000. If he dies after the age of 40, his beneficiary will receive no benefit because the policy has expired. If he renews the policy, the premiums will be higher because they will be based on his age of 40 rather than 30.

If George is diagnosed with a terminal illness during the first policy term, he will most likely be ineligible to renew the policy when it expires. Some policies do provide guaranteed re-insurability (without the need for proof of insurability), but such features, when available, tend to raise the policy's cost.

Types of Term Life Insurance

There are several types of term life insurance; the best option for you will depend on your specific circumstances.

Level Term, or Level-Premium, Policies

These offer coverage for a set period of time ranging from 10 to 30 years. The death benefit and premium are both fixed. Because actuaries must account for rising insurance costs over the life of the policy, the premium is higher than for yearly renewable term life insurance.

Yearly Renewable Term (YRT) Policies

Yearly renewable term (YRT) policies have no set term but can be renewed year after year without the need for proof of insurability. Premiums vary from year to year; premiums rise as the insured person ages. Although there is no set term, premiums can become prohibitively expensive as people age, making the policy unappealing to many.

Decreasing Term Policies

The death benefit on these policies decreases on a predetermined schedule each year. For the duration of the policy, the policyholder pays a fixed, level premium. Decreasing term policies are frequently used in conjunction with mortgages to match coverage with the declining principal of the mortgage.

Once you've decided on the best policy for you, make sure to thoroughly research the companies you're considering to ensure you get the best term life insurance available.

Benefits of Term Life Insurance

Young people with children are drawn to term life insurance. Parents can obtain extensive coverage at a reasonable cost. When a parent dies, the significant benefit can replace lost income.

These policies are also ideal for people who only require a limited amount of life insurance. For example, the policyholder may determine that by the time the policy expires, their survivors will no longer require additional financial protection or will have amassed sufficient liquid assets to self-insure.

Term Life Insurance vs. Permanent Life Insurance

The primary distinctions between a term life insurance policy and a permanent insurance policy, such as universal life insurance, are the policy's duration, the accumulation of a cash value, and the cost. The best option for you will be determined by your requirements; here are some things to consider.

Cost of Premiums

Term life insurance policies are ideal for people who want comprehensive coverage at a low cost. Customers who purchase whole life insurance pay higher premiums for less coverage, but they have the peace of mind of knowing they are protected for life.

While many buyers prefer term life insurance for its affordability, they are paying premiums for an extended period of time, and having no benefit after the term expires is an unappealing feature. Term life insurance premiums rise with age and can become prohibitively expensive over time. Renewal term life premiums may be higher than permanent life insurance premiums would have been at the time the original term life policy was issued.

Availability of Coverage

Unless a term policy is guaranteed renewable, the company may refuse to renew coverage at the end of the term if the policyholder develops a serious illness. As long as premiums are paid, permanent insurance provides coverage for life.

Investment Value

Some customers prefer permanent life insurance policies because they can include an investment or savings vehicle. With a growth guarantee, a portion of each premium payment is allocated to the cash value. Some policies pay dividends, which can be distributed or deposited within the policy. Over time, the cash value growth may be sufficient to cover the policy's premiums. There are also some distinct tax advantages, such as tax-deferred cash value growth and tax-free access to the cash portion.

Financial advisors warn that the growth rate of a cash-value policy is frequently paltry when compared to other financial instruments such as mutual funds and exchange-traded funds (ETFs). Furthermore, significant administrative fees frequently reduce the rate of return. As a result, the phrase "buy term and invest the difference" has become popular. However, the performance is consistent and tax-advantaged, which is advantageous when the stock market is volatile.

Other Factors

There appears to be no one-size-fits-all solution to the term versus permanent insurance debate. Other things to think about are:

• Is the rate of return on investment sufficiently appealing?
• Is there a loan provision and other features in the permanent policy?
• Is the policyholder running or planning to start a business that requires insurance?
• Will life insurance help to protect a large estate from taxation?

Term Life Insurance vs. Convertible Term Life Insurance

A convertible term life insurance policy is a term life policy with a conversion rider. The rider guarantees the right to convert an existing term policy or one that is about to expire to a permanent plan without having to go through underwriting or proving insurability. The conversion rider should give you the freedom to convert to any permanent policy offered by the insurance company.

The main benefits of the rider are that it keeps the original health rating of the term policy after conversion, even if you later have health issues or become uninsurable, and that you can choose when and how much coverage to convert. The premium for the new permanent policy is determined by your age at the time of conversion.

Of course, because whole life insurance is more expensive than term life insurance, overall premiums will rise significantly. The benefit is that approval is guaranteed without a medical exam. Medical conditions that arise during the term life period cannot be used to increase premiums. However, if you want to add additional riders to the new policy, such as a long-term care rider, the company may require limited or full underwriting.

What Is the Difference Between Term Life and Whole Life Insurance?

Term life insurance covers you for a set period of time, usually between 10 and 30 years. After a term policy expires, premiums can be recalculated based on the holder's age, life expectancy, and health. Whole life insurance, on the other hand, covers the policyholder for the rest of his or her life. Unlike term life insurance, whole life insurance includes a savings component in which the contract's cash value accumulates for the holder. The holder can withdraw or borrow against the savings portion of their policy, which can then be used as a source of equity.

Do You Get Your Money Back at the End of a Term Life Insurance Policy?

If a term life insurance policy holder outlives the policy, their money will not be returned. Meanwhile, whole life insurance premiums can be up to ten times higher in comparison. This is because the insurer's risk is much lower with term life policies.