Most people have heard of term life insurance before. They may even have a policy. However, there are still a large number of people who don’t know what this type of policy offers or why it’s a smart option.
With a term life insurance policy, named beneficiaries receive the death benefit outlined if the person who was insured happens to pass away within the term period. It is a pretty simple concept: select a policy amount and a period of time for coverage, and then shop around.
Most buyers select policy terms that cover the years when their families need financial support the most. Typically, this is when kids are still growing up and while adults are paying off their mortgage and other debts. Common terms available include 10, 20, and 30 years.
The Specifics of a Term Life Insurance Policy
Most term life insurance policies don’t have a cash value or investment component, which is different from permanent life insurance. For example, whole life policies provide coverage for a person’s entire life.
With a term policy, the insured individual is unable to borrow money from it or to cancel the policy and receive cash. If the premiums aren’t paid before the term ends, the policy lapses and coverage is terminated.
The insurance policy also expires when the term comes to an end. If an individual still requires life insurance coverage, they need to renew their policy; however, the price to do this is typically higher.
Types of Term Life Insurance Coverage
There are several types of term life insurance coverage available to choose from. Some of the most popular are highlighted here.
Level-Premium Term Life
Considered the most common option of term life insurance coverage. People who have these policies pay the same premium year after year, and beneficiaries receive the guaranteed death benefit if an individual passes away.
According to information from the Insurance Information Institute, the most popular time periods for these policies is 20 years.
Annual Renewable Term Life
Just as the name implies, this policy is renewed each year; however, the premium may go up. The policy is going to spell out these potential increases. It is ideal for individuals who have a short-term need for life insurance.
With this policy, an individual receives a death benefit that is reduced over time, along with the premiums paid. Many opt for this type of coverage if they want to cover a certain type of debt, such as their mortgage.
“Return of Premium” Term Life
Provides a refund of paid premiums to people don’t pass away during the term of the policy. This isn’t a good option for individuals who don’t like the thought of paying for life insurance that may expire without providing a payout. Due to the refund feature, it’s more expensive than a comparable amount of a standard term life insurance policy.
Is Term Life Insurance the Right Option?
If there’s someone, such as young children or a spouse, who is dependent on a person’s income, and there isn’t much money in savings, then investing in life insurance is a smart and responsible action.
Term life insurance policies are designed to provide coverage when someone is at risk of dying when dependents still rely on the insured person’s support. Those family members left behind can use the payment to cover debts, save for children’s future needs, and to fund daily expenses.
There are some people who would be better with term, rather than whole life, insurance. For example, if the individual has no dependents who require financial support for the remainder of their life, such as a child with special needs, or if there are no plans to use the life insurance for a legacy, to provide for family members, or to donate to a charity.
Another situation where term life insurance is a smart choice is if a person doesn’t expect to pass away with an estate that would leave their heirs having to cover a tax burden. For the majority of individuals shopping for life insurance, term policies make the most sense.
The Cost of Term Life Insurance Coverage
The affordability of a term life insurance policy is extremely appealing compared to permanent life policies. If a person is still relatively young and healthy, they should be able to get exceptionally low rates for their coverage. While men typically pay more than women, the rates are still much lower than permanent life policies.
Keep in mind, though, many insurance sales agents may try to talk individuals into a whole life policy, as these cost more. Don’t op for this unless it is absolutely necessary for a person and their situation. It simply isn’t worth the additional cost, which is a statement that is true for both men and women.