If you are unable to pay your bills, purchasing life insurance can be a great way of providing financial protection for your loved ones. Term life insurance is a cost-effective option that provides coverage for a limited time. Every person’s financial situation and life insurance needs are different. Therefore, the coverage required will vary.
Buying term life insurance has its advantages and disadvantages. There are also different types of coverage. It can be confusing to learn the intricacies of term insurance.
What is term life insurance?
Term life insurance is a contract that you enter into with a company to purchase a certain amount of money for a specified time period, typically 10-30 years. The life insurance company will pay the death benefit amount to the person you have designated, provided you make the required premium payments.
| Term life insurance has many advantages | Term life insurance has its disadvantages |
|---|---|
| Permanent life insurance is less expensive | Wealth cannot be built by savings or investments. |
| It is more affordable to buy a large death benefit amount | Coverage is limited to a specific time period |
| For a term of policy, level premiums | If you live beyond the policy’s expiration date, sunk cost |
Term life insurance policies offer many advantages
Term life insurance offers a few key benefits that make it attractive for people who require a higher death benefit. It is often the most affordable type of life insurance, particularly for younger people. This makes it appealing to young parents. A higher death benefit at a lower price can help parents provide for their children in the event of an emergency.
Financial planners often recommend that people buy term life insurance, and then invest the money they save by not buying more expensive permanent insurance. For those with level premiums the cost of the policy will not rise with the policy’s duration as with other types.
Term life insurance policies have some disadvantages
Term life insurance has its drawbacks. It lacks the savings component that a whole-life insurance policy offers. The policy’s only value to policyholders is its death benefit. Some policyholders choose to use permanent life insurance policies for wealth building and investment. However, this option is not available in term life policies.
A term life insurance policy does not cover a policyholder’s beneficiaries. There is a possibility that policyholders will outlive their policies and the coverage could end up being a sunk expense. A study by Penn State University shows that 99 percent of term policies do not pay out a death benefit.
What is term life insurance?
Term life policies have no value other than the guaranteed death benefit. There is no savings component, unlike a whole-life insurance policy. A term life insurance policy provides insurance for the policyholder’s beneficiaries in the form a cash death benefit. The cash benefit can be used by beneficiaries to pay any remaining costs, such as funeral costs, consumer debts, or healthcare bills, upon the death of the policyholder.
Policyholders can’t use term life insurance to build wealth because it doesn’t provide a savings vehicle. A term life insurance policy cannot be used for estate planning or charitable-giving. A term life insurance policy’s premium covers only the cost of underwriting insurance. This is typically less costly than permanent life insurance premiums.
Different types of term life insurance
There are many types of term insurance. Some offer greater guarantees than others. The policy will be more expensive if there are more guarantees. Here’s a list of all the major types and benefits of term life insurance policies.
- This type of coverage is called level term insurance. The premiums and death benefit are the same throughout the policy’s lifetime. Level term insurance typically lasts between 10 and 30 years.
- Decreasing term insurance is a type of insurance that covers a decreasing amount of debt, such as a mortgage. It’s less expensive than other types because the death benefit gradually decreases.
- Guaranteed renewable term insurance (GRT): Policyholders can renew their policy at any time without needing to go through a medical exam or prove that they are still insurable. This type of insurance is more costly overall and the premiums for each subsequent term will increase. A guaranteed renewable term coverage is offered by a yearly renewable term.
- Convertible term insurance is a type of term life insurance that can be converted to a lower amount of permanent coverage. This type of insurance is for people who want more coverage but also have some coverage when they pass away.
- The return-of-premium type of insurance: Although this insurance is the most expensive, it provides a money back guarantee. This type of term insurance is a smart investment, especially if you can afford it. Statistics show that 99 percent never pay a death benefit.
What is the cost of term life insurance?
The policyholder’s age, health, and expected life expectancy are all factors that affect the premium for term life insurance. Pricing for term life insurance policies can be highly variable. However, it is usually much cheaper for younger users than for those who are nearing retirement or already retired.
There are many factors that term life insurance providers will consider. It’s a smart idea to compare rates and shop around. An insurance professional licensed can provide information about the role of health in an insurer’s underwriting decision.
What happens if I don’t get my money back?
You will not receive any money back if you do not purchase a term-of-premium return-of-premium policy. This is one potential drawback to purchasing term life insurance. Although it is more costly than other types of term insurance, if you are concerned about the premium return component, you might talk to a life agent to determine if term insurance is right for you.
Questions frequently asked
What happens to term insurance after the term ends?
Policyholders have the choice to renew a term-life insurance policy for a predetermined period, convert it to a permanent plan, or let it expire.
Although most term policies allow the plan to expire, this can mean losing any money that was paid into premiums. However, some providers offer “return of premium” options which allow customers to pay higher premiums to get all their premium payments back if they do not live to the end of their term.
Can I get a life insurance policy on someone?
It is possible to get a life insurance policy for someone else but there are certain restrictions. The policy must be purchased by the same person as the insured. The policy buyer must also prove that the insured person’s death would have an adverse impact on them.