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Term life insurance is the most straightforward type of policy. It offers temporary coverage and pays a one-time lump sum to your beneficiaries when you die. Thanks to its lower premiums, it’s the best choice for shoppers who have financial dependents but only need life insurance for a specific period of time.
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What is term life insurance?
Term life insurance is a policy that provides protection for a set number of years — such as 5, 10, 15, 20, 25 or 30 years.
If you outlive your term, your coverage will expire and your beneficiaries won’t get any money. But if you die during your term, your loved ones will receive a one-time lump sum payment. This is known as the “guaranteed death benefit,” and you can decide how to allocate the funds between your beneficiaries when you sign up for a policy.
How does term life insurance work?
When you purchase a term life policy, you agree to pay premiums in exchange for coverage. The coverage lasts for a specific period of time, and 20 and 30 years are the most popular “terms.” As a result, term policies are popular with people who don’t need life insurance forever. For example, young parents who just want enough coverage to get their kids through college, when they’ll enter the workforce and start earning their own money.
Typically, the premiums stay the same for the life of the policy, so you know exactly how much you’ll pay each month or year.
The amount of coverage you can buy varies between insurers. Depending on your income, assets and financial obligations, you could purchase a policy that’s valued anywhere from $10,000 to $10 million. If you die during your term, your beneficiaries will receive a death benefit that’s equal to the face value of your policy.
Let’s say you took out a 20-year, $250,000 term life policy. If you pass away while the policy’s in force, that $250,000 will be distributed tax-free among your beneficiaries according to your wishes.
Unlike permanent policies, term life insurance doesn’t accrue cash value over time.
Can I add riders to a term life policy?
It depends on your insurer. Some providers offer the following riders:
- 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’ll need to do it before a deadline — usually within the first five years of taking out a policy, or before you turn 65, 70 or 75.
- Disability rider. This rider kicks in to replace a percentage of your income if you become disabled and can’t work.
Pros and cons of term life insurance
- Cost-effective. Term life insurance is the cheapest type of coverage, and your premium is typically locked in. The younger and healthier you are, the lower your premium will be.
- Simple to understand. Permanent life insurance policies can be complicated, but term life has a clear purpose: to provide a lump sum payment to your loved ones when you die.
- Tax-free payout. The payment to your beneficiaries won’t be taxed in most scenarios. Find out when your life insurance payout is susceptible to taxes.
- Convertibility feature. Some providers offer a conversion option, which means you can upgrade to a permanent policy without taking another medical exam.
- No-exam policies on offer. Since term life insurance is temporary and straightforward, some modern insurers issue same-day policies.
- Expiry date. Your insurer will terminate your coverage at the end of your term. If you still need life insurance, you’ll have to purchase a new policy — usually at a higher premium.
- Fixed death benefit. Term life insurance is inflexible in that the coverage amount stays the same. If you want to top up your coverage, you may need to take out another policy.
- No cash value. These policies don’t become a cash asset over time or offer a return of investment.
How to get a quote
Most providers offer term life insurance, so there’s an opportunity to shop around and find the best possible premium.
Once you’ve decided on your term and how much coverage you want to buy, follow these steps:
- Get quotes from a handful of providers.
- Compare the quotes, including the policy features, premiums and available riders.
- Choose the company that best suits your needs and budget.
- Apply for coverage. Typically, this involves filling out a form with your personal, contact and employment details, as well as a questionnaire about your health, lifestyle, and family medical history. Some insurers will require a medical exam, which can be scheduled at a time and place that’s convenient for you. During the medical exam, a technician will record your height, weight, and blood pressure, and pass those details on to your insurer.
- Assess and adjust your coverage as needed. When your insurer comes back with a proposed policy, review it and request any changes.
- Sign off on your policy. When you’re happy with your policy and premium, sign your policy documents and designate your beneficiaries. You can nominate multiple beneficiaries, and specify how the money should be divided between them.
Can I get coverage without taking a medical exam?
Yes. Many insurers offer term life policies that don’t require a medical exam, and some issue instant-approval policies — which means your coverage could go into effect on the same day.
If you opt for a no-exam policy, just know your insurer might charge a higher premium to compensate for the risk. In most cases, you’ll still need to complete a questionnaire about your health and family medical history.
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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 and the payments stay the same, so it’s easier to fit into your budget. 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 — which is the main purpose of life insurance.
Types of term life insurance
There are various types of term life insurance. These include:
- Level term life insurance. By far the most popular policy, level term life insurance offers predictable premiums. This means you’ll pay the same amount of money each month or year, depending on the payment schedule you choose.
- Decreasing term life insurance. Like level term, decreasing term life insurance has steady premiums, but the death benefit gradually decreases — either monthly or annually — over the life of the policy. The terms typically range from one to 30 years, and this policy is ideal for those who know they’ll have less of a need for life insurance as time goes on.
- Increasing term life insurance. With this policy, the premium and death benefit rise every year. Increasing term life insurance is usually sold as a supplement to permanent policies.
- 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. Also 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 up to 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 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.
Term life insurance rates by age
A 20-year term life insurance policy – worth $500,000 – for someone between the ages of 25 and 40 would average around $28 a month.
Here’s the average monthly premium a 20-year term life policy would cost for both male and female applicants.
Prices shown in table are an average for non-smokers and should only be taken as a rough guide.
Term or whole life insurance: Which is better?
For the average person, term life insurance is sufficient. It provides peace of mind and a sense of financial security for your family. It’s the cheapest and most easy-to-understand coverage, so it suits those who want to cover specific financial obligations, like a mortgage, student loans, or children.
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.
Over time, this cash value grows with interest, and once you’ve accumulated enough, you can start to take out loans against your policy. In this way, whole life insurance is ideal for those who have complex life insurance needs, and want to treat their policy as a buildable cash asset.
Dive deeper into term vs whole life insurance
Term life insurance offers predictable payments and protection for a set period of time. For these reasons, it’s 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.
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