Term life insurance is a popular option for people who wish to protect themselves against the financial burdens that come with having a family.
If you get term life insurance, you’ll have a safety net that can help you pay your mortgage, send your kids to college, or take care of other critical matters if you’re no longer alive.
What Is Term Life Insurance?
Term life insurance is a contract between a policyholder and an insurance company that states that if the insured person dies during the policy’s time term, the insurer would pay a death benefit to the policy’s beneficiaries.
When purchasing term life insurance, you must choose between two options: the term duration and the coverage amount.
How a Term Life Insurance Policy Works
The annual costs of a term life insurance policy remain the same year after year for a certain term length, such as 10 or 20 years. You can normally renew the policy after the level term period has ended, but at increasing rates each year you renew.
If you do not renew your policy after it has expired, it will expire. Unless you purchased a return of premium term life insurance policy, you will not receive any of the premiums placed into the policy.
Many people purchase term life insurance to replace their income. They’re seeking for life insurance that will cover a family’s needs for a set number of years if the family member is unable to work and make money. Term life is beneficial for:
- Covering the years of a mortgage, so another borrower does not have to sell the house.
- Covering other specific debts that would be passed on to someone else.
- Covering the years until children have graduated from college, to make sure there are funds for tuition and living expenses.
The policyholder selects both the term duration and the amount of coverage, such as $500,000.
If the insured individual dies while the policy is active, the policy’s death benefit is paid to the beneficiaries. The coverage stops if the insured person lives longer than the policy’s term and does not renew it.
You may be eligible to convert your term life insurance policy to a permanent life insurance policy, such as whole life or universal life. This is a good strategy to utilize if you recognize you need more life insurance coverage but don’t want to shop for a new policy due of your present condition.
Types of Term Life Insurance
Level term life insurance
Throughout the period of a flat term life insurance policy, the premiums and death benefit remain the same. Rates won’t go up as you become older, and the death benefit will be the same whether you die in the first or last year of your policy.
A level term life insurance policy may be appropriate for someone seeking long-term consistency.
Annual renewable term life insurance
The rates on an annual renewable term policy rise each year you renew it. You won’t have to reapply if you buy this policy because you’ll be guaranteed coverage.
It could be useful for folks who need to fill a temporary gap in their life insurance coverage. A short-term level term life policy, on the other hand, would be a preferable option.
Decreasing term life insurance
The premiums on a decreasing term life insurance policy remain the same during the policy’s term, but the death benefit lowers significantly over time.
Mortgage life insurance is a type of term life insurance with a decreasing term. The dividend is linked to the decreasing balance of your mortgage, and the mortgage lender, not your family, is the benefactor.
Regular term life insurance is a better option because the payoff goes to your family, who can use it for whatever they like.
Return of premium term life insurance
A return of premium term life policy promises to refund the premiums you paid if you outlive the policy. As you can imagine, the refund feature makes the policy more expensive.
Return of premium term life is available from companies such as Cincinnati Life, State Farm Life and Vantis Life.
How Much Does Term Life Insurance Cost?
Age and health are significant factors in life insurance rates when you’re buying a policy. Below are examples of rates for healthy life insurance buyers.
Examples of annual costs for 20-year, $1 million term life insurance
|Rates are for healthy non-smokers, of average height and weight. We averaged the five cheapest quotes we found online.|
Factors That Could Affect Term Life Insurance Rates
The term life insurance coverage amount and term length affect your premiums. Other factors in life insurance quotes include:
- Height and weight
- Current and past health
- Family health history (parents and siblings)
- Nicotine and marijuana use
- History of substance abuse
- Driving record (especially DUIs and moving violations)
- Certain hobbies and activities (such as aviation, scuba diving and other risky hobbies)
- Criminal history
How Much Term Life Insurance Do You Need?
A good term life insurance amount is generally one that matches the debts or obligations you want to cover. Life insurance is often intended to pay a family’s expenses that would have been paid by the person’s salary.
If income replacement is your goal, you’ll want to know the approximate amount your family would need to maintain your standard of living for the time period you want to cover.
Picking a Term Life Insurance Length
To choose the best duration for a term life insurance policy, consider the length of the debt or situation you want to cover. For example, if you’re buying term life to cover the years until your children are through college, and that’s in nine years, you might pick 10-year term life insurance. If you just bought a house and took on a 30-year mortgage, you’re likely looking at 30-year term life.
Term life insurance is typically available in lengths of 5, 10, 15, 20, 25 and 30 years. Some companies offer longer terms of 35 and 40 years (such as Banner Life and Protective).
The most common term life length purchased is 20 years, says Steve Robinson, Vice President of Partnerships for Legal & General America, which owns Banner Life.
If your family’s financial needs stretch past the typical term life lengths, consider a permanent life insurance policy, such as universal life insurance.
Most common lengths of term life insurance
|Length of policy||Percent of term life buyers|
|Annually renewable (year by year)||5%|
What Happens if You Outlive a Term Life Policy?
When your initial level term period ends (such as at the end of 10, 20 years or 30 years), you can renew the policy at a higher rate each year. You won’t receive a refund for your premiums paid (unless you purchased “return of premium” term life insurance).
It’s a good idea to get quotes for a new policy before you pay the higher renewal rate. Even though you’re older and may be less healthy, you could still find a better deal in a new policy.
Some folks decide they no longer need life insurance before they reach the end of the term and stop making payments. Before you go this route, make sure you truly no longer have the need for life insurance. If you end a policy and your life circumstances change later, you could regret not having kept the policy.
Choosing a Term Life Insurance Company
It’s a good idea to compare life insurance quotes to start your life insurance shopping journey. You may be tempted to focus solely on cost when you’re choosing an insurer. But the best term life insurance companies will offer benefits that give flexibility at a good price.
Coverage features to look for include:
- Are there living benefits? These allow you to access your own death benefit in cases of severe illness. You can use the money to pay for medical expenses, or anything else.
- Is the policy guaranteed to be renewable? This allows you to renew the policy (at a higher price) once the level term period runs out. It can be useful if you reach the end of the level term period and still need life insurance but have health problems.
- Can you convert the term policy to a permanent policy? This allows you to switch to a permanent life insurance policy. But there’s usually a deadline for doing it, so make sure you know your time window for converting to a permanent policy.
- Can you change the policy face amount? If your life insurance needs change in the future, can you adjust your coverage amount? Usually you can only adjust downward.
Other tips for buying term life insurance
- Laddering life insurance: If you have life insurance needs of different lengths, you can ladder life insurance policies to save money. For example, you might buy a 30-year policy to cover the length of a mortgage and a 20-year policy (or rider on the 30-year policy) to cover the time until children are out of college. This way you’re not grouping all obligations into one long policy.
- Temporary insurance: You often have the option to include a check for the first premium payment with your application and lock in coverage from your application date forward. It’s common for an application to take a month or more to process. This gives you coverage during the application process. Ask your agent about this “temporary coverage” before you submit the application.
What to Expect When You Apply for Term Life Insurance
When you have a quote that you like and are ready to buy a policy, you’ll fill out an application. The life insurance agent will likely go over your application answers. You may be asked to sign releases, such as one for your medical records.
Once the application goes to the insurance company, you may be asked to do a life insurance medical exam. This often includes height, weight, blood pressure, blood and urine samples, and questions about your prescriptions and health to verify the information on the application.
Depending on your age and/or amount of insurance requested, a life insurer might also request an EKG or cognitive assessment.
Behind the scenes, the life insurance company will be doing its own research on you. This often includes:
- Accessing a prescription drug database to see your current and past prescriptions.
- Requesting your medical records (if you signed a consent form).
- Pulling your motor vehicle report.
- Accessing information from past applications for individual life and health insurance from MIB Group.
- For high amounts of life insurance, such as $5 million and up, getting a third-party verified financial statement.
Term Life Insurance Alternatives
Term life insurance isn’t the only type of life insurance. There are also multiple types of permanent life insurance policies.
Unlike term life insurance, permanent life policies last your life as long as you make your payments. So, beneficiaries are guaranteed a death benefit with a permanent life policy. These policies additionally build cash value, which lets the policyholder tap into the policy during their lifetimes.
Here are different permanent life insurance policies:
Whole life insurance
Whole life insurance guarantees a death benefit as long as you make your payments. It also guarantees you a minimum rate of return on the cash value, level premiums and a guaranteed death benefit that won’t decrease.
Universal life insurance
Universal life insurance policies offer lifelong coverage and often build cash value, which grows tax-free. You may be able to adjust your premium payments and the death benefit, within certain limits.
There are multiple types of universal life insurance policies:
- Guaranteed universal life: The cheapest universal life policy typically, a guaranteed universal policy offers cash value, which can be minimal. However, it doesn’t offer flexibility to adjust premiums and death benefit, which are found in some other universal life policies.
- Indexed universal life: An indexed universal life insurance policy connects a policy’s cash value to an index, such as the S&P 500. You can change premiums and the death benefit, within certain limits.
- Variable universal life: A variable universal life insurance policy’s cash value is tied to sub-accounts that can include stocks and bonds. The success of the investment choices impacts the policy’s cash value. You have the flexibility to make changes to premiums and death benefit. A variable universal policy requires the policyholder to manage the investments and can result in gains or losses based on your choices.