Your Guide To Term Life Insurance
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Term life insurance is a better option than permanent (i.e. Whole) life insurance in over 90% of cases (in my estimation).
However, it’s highly unlikely any other life insurance agent would reveal that to you. Permanent life insurance is how agents make a living. Fees and commissions for term life insurance are minuscule compared to permanent life.
But we are committed to doing what is in YOUR best interest, and we’ll help you decide if a permanent life policy is actually a good fit. Or if term life is the better solution.
First, let’s dig into the details of life insurance…
An Introduction To Life Insurance
Life insurance provides critically crucial financial protection against life’s uncertainties. It’s a contract between the policyholder and the insurance company, where the insurance company promises to pay a sum of money upon the death of an insured person. And it’s a pillar of a sound financial plan. It’s the only vehicle that can provide immediate cash to replace the loss of income when an income earner dies.
Reasons and Uses For Life Insurance
Life insurance provides critically crucial financial protection against life’s uncertainties. It’s a contract between the policyholder and the insurance company, where the insurance company promises to pay a sum of money upon the death of an insured person. And it’s a pillar of a sound financial plan. It’s the only vehicle that can provide immediate cash to replace the loss of income when an income earner dies.
The primary use of life insurance is income replacement for the surviving spouse and family. However, there are many other uses as well. For example:
- Paying final medical bills and final expenses
- Paying for a child’s education
- Paying off a mortgage or other debt
- Paying estate taxes or estate settlement costs
- Providing retirement funding for the surviving spouse
- Leaving a legacy or inheritance
- Charitable donations
There are also business uses for life insurance, such as:
- Funding to buy out the deceased partner’s business interest
- Replacing income lost by the death of a key employee
Types of Life Insurance Coverage
There are two main types of life insurance: term life and permanent life.
Permanent Life Insurance
As the name implies, permanent life insurance lasts the insured person’s entire life. The critical component of permanent life insurance is it builds up a “cash value.” Cash value is a savings or investment component that grow tax-free throughout the policy’s life. Policy owners can access the cash value while the policy is in force, providing a “living benefit.”
There are four different types of permanent life insurance:
- Whole (or Ordinary) Life
- Universal (or Adjustable) Life
- Variable Life
- Variable-Universal Life
For more information about these different types of permanent life insurance, please check out our general life insurance page.
Term Life Insurance
Term life insurance is temporary life insurance coverage that only lasts a specified period of time. It can last a certain number of years – commonly 10, 20, or 30. Or it can last until the insured individual reaches a certain age – such as 55 or 60.
A term life insurance policy will only pay if the insured person dies during the specified term. The policy expires without further value if the insured individual doesn’t die during the term.
Term life doesn’t contain a cash value component. It provides pure death benefit protection. However, this means term life provides the greatest amount of coverage for any given amount of premium dollars at a specified age. (i.e. Term life is significantly cheaper than other options.)
Understanding Term Life Insurance
There’s a lot to know about term life insurance. There are many different characteristics and types of term coverage.
Term Life Policy Duration
Term life insurance only pays a death benefit if the insured individual dies within the specified term of the policy. A policies term can be:
- A specified period of time from the date of issue. (For example 1, 5, 10, 20, or 30 years)
- A period of time that ends at a specific age of the insured individual (For example, Age 65 or 70)
Renewable Term Life Insurance
Renewable term life insurance is a type of term life insurance that provides the option to renew the policy for additional periods of time. Because the policy can be renewed, it can provide coverage for a longer period of time than traditional term life insurance.
However, the premium will (in most cases) increase to reflect the insured individual’s new age. And the premiums will typically continue to increase with each renewal.
Many times the policy can be renewed without having to undergo a new medical underwriting. Or the insured may be able to get a lower premium by submitting acceptable proof of insurability.
Convertible Term Life Insurance
Convertible term life insurance is a type of term life insurance that contains the option to convert the term policy to permanent life insurance at a later time. The policy owner has the option to convert the policy. And this option can be exercised without the need for new medical underwriting. This is beneficial for individuals who have had changes in health that would make it difficult for them to qualify for new coverage.
Convertible term life allows the policy owner to lock in a low premium rate for a set number of years but also gives them the flexibility to convert to a permanent policy if their needs change in the future.
Since convertible term life insurance provides the conversion option, they will have higher premiums than traditional term life policies.
Three Types of Term Life Insurance
Three different types of term life insurance are suited for different needs:
- Level Term Life (a level death benefit)
- Decreasing Term Life (a decreasing death benefit)
- Increasing Term Life (an increasing death benefit)
Level Term Life
With a level term insurance policy, the premiums and the death benefit stay the same (level) during the entire policy term. Level term is the most common type of term life insurance. This type of term insurance is ideal for young families for income replacement purposes.
Decreasing Term Life
In a decreasing term life policy, the death benefit decreases until it reaches zero at the end of the term. The premiums typically remain level through the policy term. Decreasing term insurance is normally used for mortgage protection – the death benefit declines as the outstanding mortgage balance declines.
Increasing Term Life
With increasing term life insurance, both the death benefit and premiums increase over the policy term. Increasing term life insurance is typically provided as a permanent life insurance policy rider, rather than a stand-alone policy.
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