Term Life Insurance

Is term life insurance worth it?

If you have people relying on your income, a life insurance policy can ease the financial burden on your beneficiaries when you die. Term life insurance is affordable. It’s designed to replace your income during the years your family needs it most, like when you’re paying off a mortgage or raising children.

Since it’s cheap and temporary, a term policy is a simple way to protect your loved ones if you were to die prematurely.

Types of term life insurance

There are various types of term life insurance. These include:

• Joint first-to-die term insurance. If you’re considering getting term insurance as a couple, joint first-to-die is a good option. It’s usually cheaper than two individual policies, and would be payed out to the surviving partner should the other die within the term. However, realize that it can be fairly inflexible to divide in the event of a divorce.
• Annual renewable term (ART) life insurance. This is a one-year policy that your provider guarantees to renew every year for a set number of years. During this “insurability period,” you can renew your coverage without reapplying or taking another medical exam — but you’ll pay a higher premium at each renewal. ART policies are best for covering short-term needs.
• Return of premium (ROP) term life insurance. Usually sold as a rider, ROP policies refund all or part of your premiums if you’re still alive at the end of your term. While there’s a possibility you could get your money back, this type of coverage is expensive. You can expect to pay roughly 50% more in premiums than a traditional term life policy.
• Simplified issue term life insurance. This policy doesn’t require a medical exam — only the health questionnaire. While coverage often kicks in immediately, simplified issue policies are expensive and and the death benefit is capped at small amounts. They suit those who need coverage ASAP and can afford the higher premium.
• Guaranteed issue term life insurance. If you want to avoid answering any questions about your health, look into guaranteed issue term life insurance. This policy skips the medical exam and health questionnaire, and approval is guaranteed. It’s often marketed to seniors who just want to cover their final expenses. Keep in mind that because this is often more expensive than other term policies, it should be used as a last resort only if you’re denied traditional and simplified life insurance.

Term or whole life insurance: Know the difference

For the average person, term life insurance is sufficient. It’s the cheapest coverage that still provides peace of mind and a sense of financial security for your family when they need it most. It suits those who want to cover specific, temporary financial obligations, like a mortgage, student loans, or child care.

If you want lifelong coverage, it’s worth looking into whole life insurance — a type of permanent policy. It’s much more expensive than term life insurance because it has an investment component. When you pay your premium, part of it is invested to give your policy a cash value. During your life time you can even borrow from this cash value in some cases. Because of this cash value component, whole life insurance is ideal for those who want to treat their policy as a buildable cash asset.

Bottom Line

Term life insurance offers protection for a set period of time, making it ideal for those who have a specific need for life insurance and want cheaper coverage. But it doesn’t have a cash value, so if you survive the policy, you won’t get any money.

Before buying a policy, be sure to compare life insurance providers and policy features.

Frequently asked questions

• What term length should I choose?

  Think about when you’ll have the highest financial commitment. With this in mind it’s worth considering;

  • When your mortgage will be at its greatest
  • How long you want to cover your spouse for in the event of your death
  • When your children’s needs will be the highest
  • When your household income may be impacted because one parent is staying at home or working less to take care of the children

  Because of these financial commitments, term life insurance is often purchased for 20 or 30 year terms. Usually, after that amount of time the loss of your income will have a smaller impact because child dependents are old enough to fend for themselves and your mortgage is payed off.

• Can I add riders to a term life policy?

  Generally yes, but it depends on your insurer. Some common riders include:

  • Accelerated death benefit rider. If you’re diagnosed with a terminal illness, this rider pays out part of your death benefit to cover your medical and end-of-life expenses.
  • Critical illness rider. This add-on pays out a lump sum if you’re diagnosed with a critical illness specified in your policy, like heart disease or cancer.
  • Conversion rider. This rider allows you to upgrade to a permanent policy, like whole life. If you want to convert your coverage, you may need to do it before a deadline — usually within the first 5 years of taking out a policy, or before you turn 65, 70 or 75.
  • Disability income rider. This rider kicks in to replace a portion of your income if you become disabled and can’t work. Alternatively, you may want to consider getting disability insurance.

• My term life insurance policy is about to expire. What are my options?

  When your term is up, you’ll no longer have coverage. At that point these are your options:

  • Purchase another term life insurance policy. If you still have financial obligations or people relying on your income, consider taking out another term life policy, or see if you have the option to renew. You can expect to pay a higher premium now that you’re older. To help lower the cost, opt for a shorter term, such as five or ten years.
  • Look into annual renewable term life insurance. If you don’t want to commit to a lengthy policy, you can take it year by year with annual renewable term (ART) life insurance. You won’t need to retake the medical exam or answer questions about your health, but your premiums will likely increase.
  • Do nothing. If you no longer have a need for life insurance, you can simply let your coverage lapse.

• What happens if I stop paying my premiums?

  If you stop paying your premiums, your insurer will cancel your policy. There may be a grace period within which the insurer will allow you to make up the payment without cancelling your policy, but check with your insurance provider to find out if you have that option.