What Features You Need To Know about Term Life Insurance
Features inherent to term life and those that differentiate it from other life insurance types include:
- Temporary Coverage
- Pure Death Benefit
- No Capital Build-up
- Fixed Coverage Amount
- Increasing Premiums
- Medical Exam for Qualification
- Tax-Free Inheritance
Term life insurance offers coverage for a limited period of time, typically 10-30 years. Unlike other types of life insurance, a term policy eventually expires. This can be a positive or negative feature depending on individual circumstances. On the one hand, temporary coverage means lower start-up premiums. On other other hand, once the policy expires it might be difficult to secure an extension due to worsening health conditions. If you can accurately predict the length of time for which you need coverage, term life insurance is most economical.
Pure Death Benefit
Permanent forms of life insurance come with savings and investment components that may or may not be suitable for your needs. Term life offers no such component; think of term life as life insurance proper, whose aim is to provide a lump-sum payout upon the death of the policyowner. This benefit can be used to pay for funeral and medical costs or to replace lost income. If you want to grow wealth in your life insurance policy, consider a permanent type of insurance life universal or variable.
No Capital Build-up
Term life insurance doesn’t accumulate wealth over time as a whole, universal, or variable policy would. As with car insurance, term life premiums go directly towards securing compensation in case the unthinkable should occur. Once you stop making premium payments or the policy matures (reaches the end of its term), you are left with zero capital. Premiums are used to solely fund the death benefit, and if no death occurs, the insurance company never pays out. This is a direct cost of insuring against risk of death.
Fixed Coverage Amount
Like all life insurance, term life can be purchased with widely varying death benefits, from as low as $100,000 to as high at $10,000,000. The amount of coverage desired directly affects the size of the annual premium, as the insurance company charges policyowners per $1,000 of coverage. One downside of term life policies is that once a coverage amount is set, it cannot be increased or decreased. This is not a problem in theory if you can accurately estimate the right level of coverage for the full length of the policy’s term, but in practice your financial situation will change many times over the course of 10-30 years. If you want a flexible coverage amount and annual premium, consider universal life or variable universal life.
Most term life insurance (non-level term life) comes with premiums that increase every years. This results from the rising risk of death as the policyholder ages. Fundamentally, all life insurance faces the grim reality of escalating mortality charges. The difference is, permanent life insurance averages out later premiums with former ones, enabling the owners to fund their policies with uniform annual payments. If level premiums are important for you, consider purchasing level term life or a permanent life insurance policy. If you only need temporary coverage, a level-premium policy is to your disadvantage.
Medical Exam for Qualification
Except for guaranteed life, virtually all forms of life insurance force potential policyholders to undergo a medical examination before issuing a policy. The exam is performed by a paramedical hired by the insurance company. The paramedical can come to your home or office to administer the health exam, which typically consists of taking physical measurements life height and weight, taking a blood and urine sample for analysis, and asking medical history questions to ascertain hereditary conditions that might put you at greater risk of death. Based on the test results the insured is given a rating class (Preferred Plus, Preferred, Standard Plus, Standard) which skews premiums higher or lower.
A great benefit of all insurance types is the ability to pass on wealth tax-free and avoid estate taxes. Unlike other investments vehicles, life insurance is uniquely designed as a wealth transfer instrument. Beneficiaries don’t have to pay taxes on any funds coming to them via a life insurance death benefit.
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