A term life insurance policy provides a death benefit or lump sum payment to a beneficiary if the policyholder dies during a specific “term” or period of time. Often called pure life insurance, term life insurance is known for being one of the least expensive life insurance options, therefore making it attractive to young families. To understand if this policy is right for you, learn the pros and cons of term life insurance as well as everything you need to know before making a decision about whether to buy it or not.
What Is Term Life Insurance?
Term life insurance covers the policyholder for a set term or period. The term of a policy dictates how long the policy is active. Term policies are typically good for five, 10, 15, 20 or 30 years. If a policyholder dies before a term is over, their beneficiaries will receive the death benefit or insurance payout. The death benefit of a policy is determined before the purchase of a policy.
If a policyholder dies after the term is over, his estate will not receive his premiums, or regular payments, back. Some policies will allow policyholders to renew a term policy, but the premiums will increase.
Unlike whole life policies, term life does not have a “cash value” against which policyholders can borrow. This means that term policies do not have a savings component and typically have much lower premiums than whole life policies.
Who Needs Term Life Insurance?
There are a number of reasons to buy life insurance. For example, if you are married and have children who depend on your income to cover a portion the household expenses, term life insurance can protect you and your family’s assets after you die.
Even if you’re single, life insurance is still important. Life insurance gets expensive as you get older, so purchasing early can help you protect yourself. Additionally, it can cover any funeral or other costs in the event of your untimely death. It can also protect significant others, family members or even roommates from the financial burden of your passing as they may be financially reliant on your income, especially if you have outstanding debts.
Business owners and investors may also want to purchase term life insurance to protect their business or personal debts. Some include life insurance in a trust to protect both the policyholder and the beneficiaries from taxation.
Pros of Term Life Insurance
Term life insurance is an easy entry point into the life insurance world. Here are a few things that make it a great option:
- It’s straightforward. Term insurance policies are generally quite easy to understand, and the terms and conditions are easily explained. Therefore, policyholders don’t have to worry about hidden fees, exclusions or other risks.
- It’s affordable. Term insurance typically costs about 20% as much as a whole life policy that offers the same death benefit.
- It’s not risky. Policyholders can cancel term policies before the term is over and therefore stop making the monthly premium payments.
Cons of Term Life Insurance
Be careful not to make a mistake in buying life insurance; there are alternatives. Although term insurance is generally a good idea, it’s not always a good idea. Here are a few limits to term life insurance:
- It’s limited. Term insurance is temporary coverage, so if you outlive your policy, the money you spent on it all goes away.
- It gets more expensive. If you outlive your first term policy and decide to extend it, the premiums will increase. Therefore, you will end up paying more down the road for the same coverage.
- No cash value. Term policies are only worth the death benefit amount. If you are looking for a policy that grows in value, you may want to consider a different type of life insurance.
How to Buy Term Life Insurance
First, decide how much coverage you will need. You might want to consider how much your family relies on you financially, then decide how long you want to ensure that they receive your income. You may also want to consider any debts you’d like to cover in case of your death. Because term life insurance is typically sold in increments of five, 10, 15, 20, 25 or 30 years, you should also consider the term of coverage you need.
Next, you’ll want to search for companies that you might want to purchase life insurance from. There are plenty of companies available. But it’s wise to only consider working with companies with an A+ or A++ rating by A.M. Best. This will ensure that you are only working with top companies.
Once you’ve selected a few companies, get quotes from the different companies and compare them. After you identify a company, you will most likely have to complete a medical exam during the application process.
Other Types of Life Insurance
Every person has unique life insurance needs. Term life insurance might be for you if you do not have a lot of money to spend on premiums and need a big death benefit. It might also be the right option for you if you plan to invest and do not want to use a whole life insurance policy to do so. But there are several other types of life insurance that you should consider, such as:
- Whole life insurance. Whole life insurance, or permanent life insurance, lasts a policyholder’s whole life. As long as the policyholder continues to make payments, the policy will cover them until they die. These policies can hold a cash value that policyholders can use if they need it.
- Universal life insurance. Like whole life insurance, universal life insurance has a cash value and lasts a policyholder’s entire life. Unlike whole and term life insurance, the premiums can vary each month.
- Variable Life insurance. Variable life insurance also has a cash value but is deposited into a series of smaller accounts so policyholders do not get to choose how their cash value is invested. They typically have lower premiums, but because the cash value is deposited into stock investment accounts, policyholders could lose money on their investments.
The Bottom Line
While some people are reluctant to buy life insurance, anyone with significant assets should seriously consider it. However, be sure to do your research before choosing a policy and company. Life insurance isn’t one size fits all, so by doing your research, you can be sure that you choose a policy that will provide for your loved ones after you die. And, of course, always be sure to consult with a financial professional before making any major money moves.
Insurance Planning Tips
- Your selection of an insurance policy can have lasting effects on your overall finances, especially once you retire. If you’re unsure of which policy to go with, a financial advisor may be able to help. SmartAsset’s free matching tool can make finding an advisor easy, as it can quickly pair you with as many as three local advisors. If you’re ready, get started now.
- Looking for a straight-forward way to see how much insurance you need to buy? A free insurance calculator can give you a quick read on what is right for you and the ones you love.
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