Life insurance is an essential tool for protecting your loved ones financially after you pass away. However, with so many different types of life insurance policies available, it can be challenging to know which one is right for you.
A term life insurance policy is a popular option that provides coverage for a set period of time and offers many benefits that make it an attractive choice, especially for people that still have a mortgage or family members relying on their income.
In this article, we will explore the benefits of term life, how a term life policy works and why it may be the best choice for your needs. Whether you are looking for affordable coverage or flexibility in your policy, term life insurance could be the right choice for you.
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Before we can start discussing the benefits of a term life insurance policy, let’s first define what it is. Term life insurance is a type of life insurance that provides coverage for a set period of time, usually 10- 30 years. It is often considered the most affordable and straightforward form of life insurance because it only pays out a death benefit if the policyholder passes away during the term of the policy.
Additionally, term life insurance is often flexible, allowing you to choose the length of the term and the amount of coverage you need. This means that you can tailor your coverage to fit your specific needs, whether you are looking for short-term coverage to protect your family during a specific time of financial need, or need longer term coverages to help cover mortgages or future expenses you might experience.
Term life insurance is good for those who want to ensure that their loved ones are financially protected but don't want to pay for a more expensive permanent life insurance policy. With the benefits of term life insurance, you can enjoy the peace of mind that comes with knowing that your loved ones will be taken care of financially in the event of your unexpected death, without having to break the bank to do so.
There are several ways you can apply for a term life insurance policy. You can purchase with a licensed agent either in person or over the phone, or you can apply for coverage online without agent assistance. No matter what your purchase preference is, you will need to meet certain criteria in order to qualify for coverage. That criteria includes age and health status. These factors will also determine how much your term life insurance policy will cost.
During the application process, in addition to your age, you will be asked a series of health related questions, and depending on the company, you may even have to take a medical exam. Generally, the younger and healthier you are, the lower your rate will be.
Once you have been approved for the coverage you applied for, you will be required to pay monthly, quarterly, semi-annual or annual premiums for the entire length of the policy term to keep it active.
If you pass away during the term of the policy, your beneficiaries will receive a lump-sum death benefit, which is the amount of coverage you selected when you purchased the policy. However, it’s important to point out that if you outlive your policy term, your coverage will expire and you will no longer be covered.
You can choose between three different types of term life insurance: decreasing term, annual renewable and level term. Make sure to research each policy well. Doing so will help you find out which term life insurance policy is the best for you.
Unlike level term insurance, where the death benefit remains constant throughout the term of the policy, the death benefit in a decreasing term policy decreases each year, usually at a fixed rate.
This type of policy is often used to cover a specific debt, such as a mortgage or a business loan, where the outstanding amount decreases over time. As the amount owed decreases, the policy's death benefit decreases in proportion, providing a decreasing level of coverage.
Because the death benefit of a decreasing term policy decreases each year, the cost of the policy is usually lower than that of a level term policy with the same initial death benefit. However, it's important to point out that while the cost of a decreasing term policy may be lower initially, it may not provide sufficient coverage if the outstanding debt or financial obligations are not fully paid off by the end of the policy term.
Annual renewable term life insurance, also known as yearly renewable term life insurance, is a type of term life insurance that provides coverage for one year at a time. Unlike traditional term life insurance, which has a fixed term of coverage, annual renewable term life insurance has no specific term. Instead, the policy is renewed each year, and the premium for the upcoming year is recalculated based on your current age.
With annual renewable term life insurance, the premium typically starts out relatively low in the first year, but increases each year as you get older and the risk of death increases. This means that the cost of coverage can become quite expensive over time, particularly as you approach an older age.
While annual renewable term life insurance can be a good option for those who need coverage for a short period of time, such as one year, it may not be the most cost-effective choice in the long run.
Level term life insurance provides a fixed amount of coverage for a specific period of time, typically ranging from 10 to 30 years, with a fixed premium that remains the same throughout the policy term.
With level term life insurance, you choose the amount of coverage you want, known as the death benefit, and the length of the policy term. One of the main benefits of level term life insurance is its simplicity and predictability. With a fixed premium and term length, you know exactly how much you will pay each month or year and how long the coverage will last. This can make it easier to budget for and plan around.
This type of policy is often a good choice for those who need coverage for a specific period of time, such as to cover a mortgage or other debt, or to provide financial support for their children until they reach adulthood. Term life insurance for seniors can also help to ensure that loved ones are protected financially in the event of an untimely death and are not left with the financial burden of covering final expenses.
While the cost can vary widely depending on the company, there are generally several main factors that determine the cost of your term life insurance policy: gender, age, health, coverage amount, and term length.
For example, the average cost for a 20-year term life insurance policy with a $500,000 death benefit, for a healthy 30-year-old male is around $223 per year, while the average cost for a healthy 30-year-old female is around $188 per year.
As you get older, the cost of term life insurance typically increases. For a healthy 40-year-old male, the average cost of a 20-year term life insurance policy with a $500,000 death benefit is about $334 per year, while for a healthy 40-year-old female, the average cost is about $283 per year.
It's important to note that these are just average costs and that your actual cost may be higher or lower depending on your individual circumstances. Factors such as smoking and pre-existing medical conditions can all increase the cost of coverage.
While it can provide valuable protection and peace of mind, there are both pros and cons to consider when choosing a term life policy. Knowing the advantages and disadvantages of this type of policy can help you answer that main question: “Should I get term life insurance?”
Term life insurance is popular because it's simple to understand and affordable. It provides flexibility allowing you to determine the coverage amount and length of term so you can get the coverage you need at a price that fits your budget. Let’s explore the pros of term life insurance and the term policy benefits in more detail.
Term life insurance policies are more simplistic than other types of life insurance like a permanent life insurance policy and that’s because there’s not much to it. With term life insurance, you simply pay a fixed premium for a fixed period of time, and if you die during that time, your beneficiaries receive a payout. It’s that simple.
The simplicity is also why it’s more affordable. Because term life insurance policies have a finite term, they tend to have lower premiums, which can make them a more cost-effective option for many people.
Term life insurance policies offer a lot of flexibility to policyholders. You get to choose the length of your coverage period, which can range from as little as one year to as long as 30 years or more as well as the coverage amount you desire. Having the ability to choose the type of term life policy you need and want allows you to tailor your coverage to fit your budget.
Families that still have kids in the household usually have tighter budgets. In addition to having to pay for a mortgage or rent, parents also have childcare expenses to think about as well as future costs like a college education. Children rely on the financial security of their parents for a very long time.
Term life insurance allows families to be able to afford an adequate amount of life insurance so they can ensure their family will not be financially impacted if there is an unexpected death.
While term life insurance can provide valuable protection to individuals and their loved ones, it also has a couple of disadvantages that should be considered before purchasing a policy. Here are some of cons of term life insurance:
If you are seeking more long-term protection, term life insurance may not be the best option. With term life once the term of the policy ends, the coverage also ends, unless the policy is renewed or converted to a permanent life insurance policy.
While term life insurance can be a great option for individuals who need coverage for a specific period of time, it may not be the best choice for everyone, particularly those who are seeking a policy that provides lifetime protection and investment features.
One of the main disadvantages of term life insurance is that it does not accumulate any cash value. Unlike permanent life insurance policies, such as whole life or universal life insurance, term life policies do not offer investment or savings features that can provide additional access to money if needed.
In addition, once the policy term expires or if you cancel it, you will not receive money back like you would with a permanent life policy.
Whether or not term life insurance is a good option for you will depend on your unique circumstances and financial goals.
With its lower premiums and flexibility in terms of coverage length and amount, term life insurance can be an effective financial tool for meeting your financial needs, such as paying off your mortgage or supporting your children until they reach financial independence.
While term life insurance may not be the best choice for everyone, it is a valuable option to consider for those who are looking for an easy and affordable way to protect their loved ones.
Our content is created for educational purposes only. This material is not intended to provide, and should not be relied on for tax, legal, or investment advice. Everdays encourages individuals to seek advice from their own investment or tax advisor or legal counsel.