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As you reach many of life's major milestones, you may find yourself paying more attention to the question of life insurance. While it might not always be an easy topic to discuss, its benefits could help your family pay off expenses — and help give them peace of mind — when you're gone. This makes purchasing a life insurance policy an important consideration in helping protect your family and loved ones.
The 2022 Insurance Barometer Study (conducted jointly by LIMRA and Life Happens) found that 2 in 5 parents indicated they are barely or not at all financially secure. In addition, 44% of U.S. households would feel financial hardship within six months if the primary wage earner were to pass away. Finding the right life insurance policy for your family can help alleviate worry about their financial future.
Here, we've covered the basics of term life insurance to help you decide if this is the right policy for you.
How Does Term Life Insurance Work?
Among the various types of life insurance, term life insurance is traditionally viewed as one of the most economical options.
Term life insurance pays a benefit if you pass away during the insurance coverage period. This period, or policy term, generally lasts 10, 15, 20 or 30. The premium must be paid in a timely manner for the policy to stay active and in force.
How Long Is Term Life Insurance?
The length of term life insurance depends on what policy you buy. For instance, if you bought a policy that lasted for five years, you would be covered the whole time of that five-year period unless you were to stop paying your premiums. The exact policy lengths that are available will likely depend on the insurance company. However, the most typical term lengths are 10, 15, 20 and 30 years. Insurance companies may also set a maximum age limit for how long the policy can last.
What Does Term Life Insurance Cover?
Term life insurance covers death from most causes, but there are a few exceptions when a term life insurance policy may not cover you. These are known as exclusions and will be outlined in your policy. Some possible exclusions include death by suicide, death from illegal activities and death in a war zone. Term life insurance also may not cover someone who lied or left off information off on their application that was related to their eventual cause of death.
What Are the Potential Benefits of a Term Life Insurance Policy?
For many people, the main benefit of a term life insurance policy is its price. These policies tend to be less expensive than permanent life insurance policies. Term life insurance also gives you the flexibility to choose the length of coverage. During this time, your premiums will stay the same.
Term life insurance is also relatively simple to understand. You pay a premium, and then your beneficiaries receive the death benefit if you die, as long as premiums have been paid. Other policies may have more features and benefits that could take a little more research to understand. Finally, some term life insurance policies give you options to possibly renew or convert your coverage.
What Are the Types of Term Life Insurance Policies?
There are two basic categories of term life insurance: guaranteed level and renewable/convertible. Keep in mind that these categories are not mutually exclusive.
Guaranteed Level Term Life Insurance
A guaranteed level term policy is a popular choice because the premium stays the same for the entire policy length. With no price increases during the term you select, it offers an economical way to purchase life insurance. When the term is over, coverage ends.
Renewable & Convertible Term Life Insurance
A renewable/convertible life insurance policy can be either short-term or extended. As its name suggests, a renewable policy can be periodically renewed — with no additional underwriting required as long as premium payments are up to date — though the premium gradually increases over time. This is a great option for those who may want temporary coverage. "Convertible," on the other hand, means you can typically convert your term policy into a whole life insurance policy without any additional underwriting or undergoing another medical exam.
When Could Term Life Be a Good Fit?
Some people feel it's important to buy life insurance when they get their first job, while others wait until they have a family to support. Whatever your motivation for purchasing life insurance, there are reasons it's smart to get insured early.
An insurance policy helps protect your loved ones financially. If you have student loan debt, credit card debt, a mortgage — or any other financial obligations — term insurance can allow your loved ones to pay off debt without worrying about the financial implications if you pass away.
This is especially important for those who have co-signed loan documents with you and would need to take over payments after your death. As you continue to move forward in your career, your income will rise — but your premium will remain the same if you've chosen a guaranteed policy.
How Does Term Life Insurance Payout Work?
When you sign up for term life insurance, your policy will have a death benefit. While you're alive, the policy will not pay you anything. If you die during the covered term, the life insurance company will pay your beneficiaries the entire death benefit as long as it wasn't an excluded cause of death and premiums are paid.
Your beneficiaries can receive a check for the entire amount. If they don't want to receive that much money at once, they can likely request to be paid in installments. They may also be able to convert the death benefit into an annuity.
What Is the Difference Between Term & Permanent Life Insurance?
Term life insurance is temporary coverage. It will only last during the policy's stated term, and your coverage will end if you outlive this period. On the other hand, permanent life insurance could last your entire life as long as you keep up with the premiums.
Since permanent life insurance can last longer, these policies typically start out charging a higher premium than term life insurance. However, if you try to renew your term life insurance policy when you're older, the premiums will likely get more expensive. By comparison, there are some permanent policies in which the premium always stays the same after you sign up.
One other key difference is cash value. This is an extra benefit on some permanent life insurance policies that builds up money you can take out or borrow while you're still alive. Keep in mind that loans, withdrawals and advances will also reduce the death benefit and cash surrender value, and may cause the policy to lapse. Term life insurance policies do not include this benefit.
Can You Cash Out a Term Life Insurance Policy?
No, you cannot cash out a term life insurance policy while you're still alive. It only pays out a death benefit to your beneficiaries if you die while insured. Unlike whole or universal life (types of permanent life insurance), term life does not build cash value.
What Happens at the End of a Term Life Insurance Policy?
At the end of the term, your life insurance coverage will end. However, you may have options to continue your life insurance. First, some policies let you convert term life insurance into permanent life insurance. You may also be able to renew your policy for another term. Since you're renewing at an older age, your premiums may be more expensive after the extension.
How Much Does a Term Life Insurance Policy Cost?
The cost of a term life insurance policy depends on a number of factors. Here are some examples:
- The length of the term: Longer terms are typically more expensive than shorter ones.
- Your age when applying: Life insurance usually gets more expensive as you get older.
- Health issues or dangerous hobbies: These could increase the cost or even render you uninsurable.
- The size of the policy: Policies with larger coverage amounts are usually more expensive.
- Extra benefits: Known as riders, these extra add-ons tend to increase the premium.
Since there are so many factors, the only way to know for sure how much term life insurance would cost is by talking with a financial representative about your specific life situation.
Examples of How Term Life Insurance Coverage Works
Once you understand the basics of term life insurance, it can be helpful to see how this policy type can be used in the real world. Here are examples of how individuals can take advantage of term life insurance:
- Sarah is a 22-year-old college grad starting her first job. While her company offers life insurance, her coverage ends if she changes jobs. She has student loans to pay off and wants to make sure that her parents — who co-signed on her loans — won't have to dip into their retirement savings if something happens to her. She decides to buy a 10-year term policy to cover the time remaining to pay off her student loans.
- Nicolette and Brad are newlyweds, both in their early 30s. They have taken out loans on two cars, just purchased a house and plan to start a family soon. They have each purchased a 30-year term policy to ensure one another and their future children are protected in case one of them passes away unexpectedly.
Regardless of what life stage you're in, life insurance is something worth considering as you prepare for the future. Think carefully about your needs and decide on a policy that fits your goals and financial budget. Term life insurance can be an economical option that can provide value and help protect those you care about the most.
Speak With Western & Southern Today to Find the Best Term Life Insurance Policy For for You
Determining which life insurance product, including which term life insurance policy, is best for you and your family can be a daunting process. Fortunately, Western & Southern’s term life experts are on hand to help you through the process of finding the policy that will meet your needs today and in the future.