Term Life Insurance Guide
Term life is a form of pure life insurance that offers temporary coverage, ranging in term from 1-30 years. Annual payments — called premiums — are paid to the insurance company to keep the policy active and secure the agreed-upon death benefit. In the event of the policyowner’s death during the term, the beneficiary is paid out a lump-sum of cash. If the insured lives past the term, the policy expires, ceasing to offer any death benefit.
Unlike other types of life insurance, term life offers pure death benefit coverage without any sort of savings or investment component. The insured must meet medical qualifications to obtain a policy. The annual premium varies depending on the amount of coverage desired and the insured’s age and health. Because chances of death increase with age, standard term life premiums increase every year the policy is held. Renewing an expired policy requires passing of another medical exam.
erm Life Insurance Features
Several types of term life insurance are available with slight variations on features. General features include:
- Temporary Coverage — Insurance lasts for a limited period of time (term).
- Pure Death Benefit — No savings or investment component. You are only paying for life insurance proper with no possibility for earning interest.
- No Capital — Policy does not accumulate value and cannot be borrowed against or cash value withdrawn (as possible with permanent types of life insurance).
- Fixed Coverage Amount — Size of the death benefit is specified at contract signing and cannot be changed without opening a new policy.
- Increasing Premiums — Annual premiums increase every year as you get older to cover the increased likelihood of death.
- Medical Exam — The policyowner must meet certain medical qualifications to open a term life policy. Exams are only required when opening a new policy.
- Tax-Free Inheritance — The death benefit passed on to loved ones is tax-free, making life insurance a great tool for preserving family wealth.
Finding the Best Term Life Insurance
Because term life insurance only provides a death benefit without an investment component, rates (premiums) consist entirely of mortality charges. Since each life insurance company uses its own mortality charts, the key to finding the best term life insurance rates is to compare several different companies. Besides finding the lowest premiums, it’s important to sign with a financially sound insurance company that can back its guarantee for upwards of 30 years with a solid asset base. For details on how to evaluate companies and find the lowest premiums see, Best Term Life Insurance.
Term Life Insurance Pros & Cons
Every life insurance product has a unique set of advantages and disadvantages. Every policy is suitable for someone, but whether a particular one is suitable for your depends on your financial position, health, age, family, and investment objectives. The pros of term life insurance include low up front costs, maximum protection with least investment, and no interest rate risk; cons include temporary coverage, annually-larger and inflexible premiums, and zero capital accumulation.
Find a detailed discuss of these and other benefits and drawbacks, see: Term Life Insurance Pros & Cons.
Types of Term Life Insurance
Term life insurance comes in several different types, including: Renweable Term Life, Decreasing Term Life, Level-Premium Term Life, and Return of Premium. The common thread in all term policies is time-limited coverage with no investment component. Compared to renewable term life, other term life policies offer no renewal or conversion leeway. Level-Term life offers consistently-sized annual premiums at the cost of higher premiums in the first half of the term. Return of premium life insurance pays back all premiums to the policyowner at the of the term even if he or she doesn’t die.
For more information on variants of term life, see Renewable Term Life, Decreasing Term Life, Level Term Life, or Return of Premium Term Life.
Who Should Buy Term Life Insurance?
Term life insurance is best suited to younger (in their 30’s and 40’s) who are in good health, only need temporary coverage, and don’t want to use life insurance as a savings or growth vehicle. Policyowners in their 30’s and 40’s can secure low premiums because statistically, they are unlikely to die. Since term insurance premiums rise with mortality risk year-over-year, individuals looking for 10-20 years of coverage can save a lot compared to other policy types. If, however, you need coverage into your 60’s and beyond, consider level-term life or a permanent life insurance option like whole, universal, or variable. Otherwise, premiums on a standard term policy will become too great.
Term life insurance is not appropriate for individuals worried about passing future medical exams due to past family medical history or developing pre-conditions. In such cases permanent insurance is the better alternative. Also, if you want build capital in your life insurance to fund a retirement or a child’s college tuition, permanent alternatives with investment components are ideal (universal or variable life).
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