Term life policies are some of the most straightforward and affordable types of life insurance on the market. When someone purchases a term life policy, their plan lays out exactly what they’re getting, how much it will cost, and how long it will last. In this post, we’ll explain the benefits of term life insurance, the different types of term life policies, and why term life insurance may be the right fit for you.
Term Life Insurance, Explained
Term life insurance is a type of life insurance that guarantees a death benefit for a predetermined amount of time (called a “term”). These terms typically range between 10 and 30 years. If the policyholder dies before the policy expires, then their beneficiaries will receive the death benefit in a lump sum payment. In general, the phrase “term life” is used to describe a group of various life insurances where:
- The policy eventually expires and
- There is no cash value component.
This is in contrast to the other major type of life insurance policy called “permanent life.” Permanent plans last your entire life and build cash value through saving vehicles. However, because of these features, permanent life insurance policies are often more expensive and complex than term life policies.
How does term life insurance work?
After meeting the qualifications for a term life policy, the process works very similarly to auto or homeowners’ insurance. As long as the policyholder continues to make their regularly-scheduled payments (called premiums), the policyholder will be covered.
If a policyholder no longer needs or wants their term life policy, they can simply stop making payments or let it expire. Once a policy expires, the policyholder would need to reapply and possibly even pass another medical exam to requalify. The older you are when you apply for or renew term life insurance, the more expensive the premiums will be.
What are the benefits of term life insurance and how do term life payouts work for beneficiaries?
So long as the policy is in good standing, your family or other beneficiaries are protected. Should you pass away prematurely from poor health or an accident, your named beneficiaries will automatically receive the death benefit outlined in your policy. It’s important to note that the IRS does not consider life insurance death benefits as taxable income, meaning your beneficiaries would not need to pay any taxes on the payout.
What if my health changes?
For most term life policies, you only have to pass a medical exam once when you first apply. If your health status changes any time during the term, the policy is still in effect as long as your payments are up to date.
After your policy expires, you’ll have to pass another health screening unless you purchased a term plan that has a renewal option or doesn’t require a medical exam. Depending on your health screening results, this may cause your premiums to be significantly higher or could even lead to a denial.
This is one reason why young people are often encouraged to buy life insurance as early as possible. The younger you are, the greater your chances of being healthy and free of any detectable conditions – which in turn means you’ll be able to lock into the lowest available term life premiums.
What is the average cost of term life insurance?
One of the biggest reasons people are drawn to term life policies is that they’re more affordable than other types of life insurance.
For example:
- A 30-year healthy, non-smoker male could expect to buy a 20-year term life policy with $500,000 worth of coverage for around $19 per month. A female with the same criteria could expect to pay around $16 per month.
- This same couple at age 50 could expect to buy the same 20-year term life policy with $500,000 worth of coverage for around $70 and $55 per month for the male and female respectively.
For comparison, the cost of term life insurance can be as much as 5 to 15x cheaper than permanent life. Of course, the actual cost of a term life policy will vary depending on a wide variety of factors such as:
- The type of term policy
- The insurance company’s rates
- The applicant’s age, gender, health history, smoking status, occupation, etc.
Types of Term Life Insurance
Even though term life is the simplest form of life insurance offered, the industry has developed many different variations of term policies to better meet customers’ individual needs at every stage of life.
Level Term Life Insurance
Level term is the most common type of term life insurance. “Level” means the premiums and death benefit do not change throughout the life of the policy. The most popular types of plans have terms ranging from 10 to 30 years.
Common Terms
- 10-year term life insurance
- 15-year term life insurance
- 20-year term life insurance
- 25-year term life insurance
- 30-year term life insurance
Direct Term Life Insurance
Direct term life insurance is a type of policy that can be purchased directly from the insurance company at any point in time. Instead of waiting for a quote or undergoing a medical exam, these policies can be purchased within minutes (usually online). For this reason, you might also hear them referred to as “no medical exam life insurance.”
Increasing Term Life Insurance
Increasing term policies have death benefits that grow over time. Since the coverage increases, the premiums will also increase each year. These types of term life policies are meant for people who want more coverage later in life (typically to cover more assets).
Decreasing Term Life Insurance
Decreasing term policies have death benefits that reduce over time. Due to a decreasing benefit, this type of term life policy is cheaper than level term policies. Decreasing term is designed for people who don’t think they’ll need as much life insurance later in life (such as when the children are grown or the mortgage is paid off).
Short Term Life Insurance
Short term is a special type of term life policy designed to be as short as one year and is meant to cover temporary gaps in coverage (for instance when switching jobs).
Renewable Term Life Insurance
A renewable term is a policy that can be automatically renewed without underwriting. This is perfect for people who fear they may be denied coverage later in life due to a possible change of health status. You should, however, expect premiums to increase as a reflection of your age each time the policy is renewed.
Convertible Term Life Insurance
Convertible term allows the term life policy to change into a whole or universal life policy without the policyholder having to go through a medical exam. These types of policies are more expensive than level term because of this built-in option.
Return of Premium (ROP)
A return of premium rider provides the same coverage and benefits as a regular term insurance policy; however, it also refunds your premium payments if you don’t die before the term expires.
Voluntary Term Life Insurance
Voluntary term life insurance policies supplement an employer’s group policy. For instance, someone who has $100,000 in coverage through their employer might add on a voluntary life policy to significantly increase their coverage amount to meet their needs.
Mortgage Protection Insurance (MPI)
Mortgage protection insurance (MPI) covers your mortgage if you were to pass away. Similar to a decreasing term policy, the MPI coverage decreases over time as your mortgage loan is paid down. The biggest difference between mortgage protection and other term life policies is that the death benefit would go to your mortgage lender and not your beneficiaries.
Who should get term life insurance?
Term life insurance policies serve a wide variety of people. Typical term life candidates include:
- Budget-conscious families
- Those who only need coverage for a certain amount of time
- People trying to fill gaps or supplement their existing coverage
- Families and single people looking for mortgage protection
- Someone who wants a simple life insurance plan
If you’d like to learn more about term life insurance, our independent insurance brokers are here to help. Our knowledgeable insurance advisors are eager to answer your questions and ready to find the best type of policy for you and your family’s needs. Give us a call today and rest assured your family is finally protected.
