Learn about Term Life Insurance
Term life insurance is designed to provide you with temporary protection lasting up to 30 years without the added cost of a savings feature in the policy.
It is pure protection, not an investment. Term life offers the most affordable life insurance coverage for a limited period of time.
If you need the most from your budget, term insurance can help.
Are You Considering the Purchase of a Term Life Insurance Policy?
If so, there’s a few important things you’ll want to learn about term insurance to help you better understand how it works, and why it may be the right choice for you and your loved ones.
Benefits of Term Policies
Drawbacks of Term Policies
Features of Term Life Insurance
Overview of Term Insurance
Term life insurance is designed for temporary coverage without any of the special features that come with some permanent life plans.
The main advantage of term insurance is that you’re buying pure life insurance coverage without any additional charges for unnecessary features involving savings accounts.
As a result, you’re getting maximum death benefit amount at the very lowest up front cost. Your premiums are much lower compared to permanent insurance.
The main drawback of term life is that you’re getting time-limited coverage with rising premiums that can ultimately leave you uninsured when you are older, if you outlive the duration of your policy, and you develop poor health.
Your term premiums are level for the entire duration of your term insurance policy.
But, if you need coverage beyond that initial period, you will need a need term life policy which will cost you more per year based on your age and health at the time you buy your next policy.
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The Pros and Cons of Term Life Insurance
Term Life Pros
Temporary Coverage – Flexible Options to Fit Your Needs
In situations where an individual needs life insurance for a definite period of time, term life’s limited coverage is ideal.
In most cases the point of life insurance is to protect against the risk of losing the income stream of a household breadwinner in the event of premature death, leaving the family in a precarious financial position. In many situations, the risk exists for a limited time.
Consider a traditional young couple just starting a family. The father works to provide an income and pay the bills while the mother takes care of the child and performs household duties.
A young family such as this isn’t likely to have large sums of cash saved up in case the father passes away. If the income provider died, the mother and child would be left in great financial risk.
Similarly, if the mother died, the father would be left with the cost of providing for childcare, cleaning, shopping, cooking and other related work performed by the mother. In this case, both parents are good candidates for term life insurance and may need their own policies.
Permanent life insurance might not be necessary in this scenario because as the family matures, the child grows up and becomes self-sufficient and the parents retire.
At retirement, income from work drops to zero and the family depends on their retirement savings to carry them through their retirement years. At this point, there is no longer a risk of losing income.
In fact, should one parent die, the other will be well-supported by a retirement savings plans originally planned for two people.
In the above scenario, the couple is better off purchasing a 20 to 30-year term life policy to hold them over until they reach retirement, when the risk of income loss and child-care expenses disappears.
If the couple can accurately gauge the length of time they really need coverage, they will save a lot of money over buying a permanent whole life insurance policy.
Makes the Most of Your Budget
All forms of life insurance include a mortality charge that pays for pure life insurance coverage – the death benefit provided by your policy. This benefit is paid for by statistically determined mortality charges regardless of whether you’re buying a term life policy or a whole life policy.
Those looking for maximum death benefits at the lowest cost are better off with term life coverage because permanent life policies include charges for additional features, which are not needed in this example.
You may choose pure death coverage by buying a term policy and investing funds on the side in a separate savings account rather than pay the fees associated with whole life insurance.
Whether this strategy wins-out depends on several key factors, including stock market and interest rate performance, the willingness to manage your savings portfolio, and pure luck in your investment choices.
Low Up-front Cost of Coverage
Term life insurance premiums correlate directly with mortality charges for life insurance policies, which in turn correlate directly to the policyholder’s statistical likelihood of death based on age, health and other related risk factors.
In non-level life insurance policies (annual renewable policy), where premiums increase every year in accordance with increasing mortality charges, young individuals can secure much lower premiums if they’re just looking for temporary coverage for a short period of time.
Permanent life insurance plans such as whole, universal, or variable try to level out premiums, which means you will pay higher premiums up-front to reduce what would have been exorbitant premiums passed on after age 60 under a non-level term life policy.
Term Life Cons
Limited Coverage
The greatest problem with term life insurance – and any form of life insurance for that matter – is that policyholders have a hard time determining how long they need their life insurance protection to last.
It’s hard to predict your future 20-30 years ahead, which results in a scenario where you may think 20 years of term insurance will meet your needs, only to find out you need additional years of coverage when the time comes.
Non-guaranteed term life policies expire and leave no assurance of one’s insurability or premium costs.
That means, if you need a new policy when your term insurance ends, your rates will be higher based on your age at that time, and you may become unable to get insured if you have developed serious health problems.
Consider the case of Jim, a 32-year-old man who buys a 25-year term life insurance policy to protect his wife and two children.
Jim expects the children to be self-sufficient by the time he’s 57 and for his retirement savings to kick in. But he has a third child in his 40’s who needs college tuition and the market is in a downturn just as Jim retires.
In this case, Jim delays the start of his retirement and is forced to purchase more life insurance to protect his family.
But, at 60 years old, Jim has health problems and doesn’t pass the medical examination, or passes, but gets downgraded (due to health issues) and his premiums go through the roof. Clearly, Jim got burned by limited coverage provided by his term policy.
Rising Premiums for Non-Level Term Policies
Non-level term life insurance comes with rising premiums, for example, an annually renewable term life plan where premiums increase each year as you renew your coverage.
Each year, as the policyholder ages and his or her risk of death rises, premiums increase. For young policy owners that isn’t a problem, but eventually non-level term premiums can rise out of control.
That’s a good reason to choose level term life insurance with rates guaranteed to remain the same for a longer period of time from 10 years up to 30 years.
Rising mortality charges exist in all life insurance policies, regardless of type, but if you’re looking for coverage into your retirement years, a permanent life policy can counteract the effect by guaranteeing consistent premiums.
This is done by averaging premium costs until the age of 95 or 100, in effect having the policy-owner pay larger premiums in the early years to reduce premiums in later years.
If you want life-long guaranteed coverage or the peace of mind of guaranteed premiums that never rise, term life insurance is not the right option.
No Build Up of Cash Value
Many people like the convenience of growing wealth along-side their life insurance. The thought of paying 30 years of premiums just to outlive your life insurance policy and see it expire seems like a big waste of money.
But in all likelihood, this is exactly what happens with most term insurance plans; only 1-2% of term policies ever payout a death benefit because their policy-owners either outlive the contract period, cancel coverage or stop paying premiums and lose their coverage at some point in time.
Term life insurance doesn’t accumulate any cash value inside the policy
However, permanent life insurance uses premiums to fund cash value savings accounts.
Regardless of circumstances, permanent life payments won’t go to waste – the death benefit gets paid out at the time of death of the insured, along with the accumulated cash value plus interest. Moreover, you can dip into the funds by taking out a loan if needed, giving the policy use while you’re still alive.
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Additional Resources and Articles
What Type of Life Insurance to Buy?
In comparing the two basic types of life insurance, the main difference is the duration of your policy – how long your coverage will last. Term life lasts for 30 years or less, while permanent coverage lasts your entire lifetime. Learn more about term life vs permanent life.
How Much Life Insurance to Buy?
Although many experts recommend between 7-10 times your annual income in life insurance. However, the most accurate way to determine your needs is to use a life insurance calculator which will ask you some basic questions about your personal finances and give you an accurate estimate based on your own personal situation. Determine your life insurance needs.
What Does Life Insurance Cost?
Your premium which is the price you pay for life insurance is based on several components including the type and amount of life insurance you buy.
In addition, your age and gender, there are several risk factors that impact your rate per $1,000 of life insurance coverage, including your health, driving record, tobacco use, lifestyle, drug and alcohol use, occupation, hobbies, weight, and credit history, among other things.
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Pros and Cons of Term Life Insurance
Death Benefit Only Life Insurance
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