What is Term Life Insurance and Do You Need It?
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Providing for the ones you love comes naturally.
You don’t think twice about working to put food on the table or pay the bills. But how can you protect the ones you love after you’re gone?
Life happens whether or not you’re ready for it or not. If you have a family or loved ones who depend on you, then life insurance can help alleviate the financial burden for them in the case of your death.
There are several options to choose from, but for many Americans, term life insurance makes the most sense.
What Is Term Life Insurance?
With term life insurance, your coverage is valid for a specific period, known as a term. Depending on your needs, the term could be 5, 10, 20, or 30 years.
If you pass while the policy is active, your beneficiaries will receive a cash benefit. If the term ends while you’re still living, then you have the option to renew or purchase a new policy.
Most buyers choose term insurance for the years with the greatest financial need. Often, this is when you’re raising young kids while paying off a mortgage or other debts.
Types of Term Life Insurance
Everyone has different needs, and term life insurance comes with a few important considerations. What you choose depends on your situation, preferences, and budget.
The most common type of term life insurance is level-premium. With this type of term policy, your monthly payment is the same no matter how long the term is. Other varieties include yearly renewable, decreasing term, and “return of premium.”
Level-Premium Term Life: This type of policy provides a basic safety net. You decide how many years you want the policy to last and the death payout amount, and your coverage remains active as long as you pay the premiums. With level-premium term insurance, the cash benefit stays the same throughout the entire policy.
Yearly Renewable Term Life: If you’re like nearly two-thirds of Americans looking to skip a life insurance medical exam, yearly renewable term insurance might be for you. The premium depends on the amount of the death benefit, your age, and your gender. Since age is a factor in determining the policy cost, your rates will increase each year you renew the policy.
Decreasing Term Life: Typical periods of coverage range from 1 to 30 years for decreasing term life. Despite its name, the premium payment is constant throughout the contract. It’s a less expensive option than level-premium because the death benefit goes down. This is a good choice if paying off a mortgage is your primary reason for purchasing life insurance.
“Return of Premium” Term Life: Some see paying for life insurance as a waste of money. But buying “return of premium” life insurance will refund the payments you made if you outlive the policy. Even though it’s more expensive than other term policies, some like the idea of getting their money back.
Is Term Life Insurance Right for You?
You can benefit from term life insurance no matter what stage of life you’re in. If someone relies on you as a source of income, chances are term insurance is a good option for you.
While income doesn’t directly affect the cost of your policy, it will help you determine how much to buy. Are you contributing to utilities, a mortgage, or other expenses? Your survivors may struggle to continue making those payments after your gone.
Dependents are another point of concern. If your children are young, childcare is an expensive reality. A survey by Care.com found that average weekly childcare costs range from $211 to $580. In addition to current childcare expenses, you’ll want to consider adding future education costs to your death benefit as well.
Your savings account also plays a role in your life insurance decision. Having considerable savings can reduce your need for life insurance. However, without a significant amount, your family won’t have much to fall back on, and term insurance becomes even more valuable.
Overall, term life insurance might be the best fit if you:
- Are on a budget
- Are looking to match your policy to the time you need it
- Want a simplified, easy-to-understand policy
- Want to pay the same premium payments during the term
- Are young and healthy
- Are middle-aged or entering retirement years and want coverage for a short time
If you change your mind down the road, converting from term to permanent life insurance might be an option. If that option is important to you, pay special attention to the policy you buy to ensure that you can make the switch.
How Much Does Term Life Insurance Cost?
The affordability of term life insurance might surprise you. Costs depend on several factors, such as whether you need a 10, 20, or 30-year term.
The price you pay depends primarily on your age and well-being. Your smoking status, your height-to-weight ratio, and your occupation are the main determinants. For instance, a $500,000 policy for a 35-year-old non-smoker is only $26.11 per month for a 20-year term. If that person is a smoker, the same policy will cost $92.82.
Keep in mind that you’ll pay less the earlier you buy term insurance. The 20-year, $500,000 policy that was only $26.11 per month at age 35 will cost almost double at $57.11 if you wait until age 45 to buy it.
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Term Life Insurance FAQs
Term life insurance is a common instrument, but there’s a lot to know. Read on to understand the ins and outs of term life insurance to see if it’s right for you.
What happens if I outlive my policy?
Term life insurance covers a specific number of years. If you’re still alive at the end of your term, the policy expires. If you don’t renew or purchase a new policy, you won’t receive a death benefit because your policy has ended.
How much term life insurance should I buy?
This is the most challenging part of buying life insurance. Protecting your loved ones is your primary concern, but paying for a higher payout than you need is unnecessary. A good rule of thumb is to multiply your wages by ten. To account for college costs if you have a young child, add $100,000 to that number.
How do I qualify for term life insurance?
To qualify for term insurance, your health and lifestyle factors are assessed. It typically begins with a simple questionnaire about your overall health, medical history, family medical history, nicotine use, driving record and if you take part in hazardous activities.
Most of the time, you must complete a medical exam with lab testing. Some companies, like Bestow, don’t require an exam.
Even without a medical assessment, the health questionnaire will uncover concerns that can make it more expensive. Smoking or other forms of nicotine use can raise your rates an average of 260% over non-smokers.
Avoiding nicotine and keeping yourself in good physical shape will have the most impact on how much you pay.
Where do I buy term life insurance?
You can find an affordable life insurance policy online in a matter of minutes. Speaking with an agent is another way to buy term life insurance, but that could limit your options as they usually only sell policies from particular companies.
Term Life Insurance Is a Great Low-Cost Option
Term life is typically more cost effective than other types of life insurance, which makes it the best choice for most people. These policies are also fairly straightforward and easy to understand. You purchase a policy for a specified amount of time, make the same payment per month, and your beneficiaries receive a pre-determined cash benefit upon your death.
The best time to apply for life insurance is when you’re young and healthy. The longer you wait, the more expensive your policy becomes over time. If you’ve already waited, don’t automatically assume it’s too late to lock in a good policy. Explore your options. Chances are there’s a policy that fits your situation and needs.