What is the Definition of Term Insurance?
Term Insurance is a type of life insurance policy that provides temporary protection lasting for a set period of time, usually up to 30 years.
If the insured person dies during the time period specified in a term policy and the policy is active, a death benefit will be paid out to the beneficiary of the insurance policy, subject to the terms, conditions and exclusions stated in the life insurance contract.
Many term life policies offer level premiums for the entire duration of the policy.
Other term policies offer decreasing or increasing benefits over time, as well as, the option to convert from term to permanent insurance.
Term insurance is initially much less expensive when compared to permanent life insurance. Unlike most types of permanent insurance, term insurance has no cash value. In other words, the only value is the guaranteed death benefit from the policy.
Understanding How Term Insurance Coverage Works
There are various types of term insurance policies available. Many policies offer level premiums for the duration of the policy, such as ten, 20, or 30 years. These are often referred to as "Level Term" policies.
A premium is a specific cost, which is typically monthly, that insurance companies charge policyholders to provide the benefits that come with a life insurance policy.
The insurance carrier calculates the premiums based on the individual's health, age, and longevity (life expectancy). A medical examination that reviews the person's health and family health history might be required.
The premiums are fixed and paid for the entire duration of the policy term. If the policyholder dies prior to the expiration date on the policy, the insurer will pay out the face value (death benefit) of the policy. If the term expires and the individual is still alive, there would be no coverage, or payout of any benefits.
However, policyholders for term life insurance can extend or renew the insurance coverage, but the new monthly premium will be based on the person's age and health at the time of the life insurance policy renewal.
As a result, the premiums could be much higher for the renewed term life policy compared to premiums paid for the original term policy that was initiated when the individual was much younger.
Premiums can vary quite a bit depending on the age of the insured person, and the amount of life insurance protection provided by the policy.
For example, a 30-year policy with a $250,000 payout can range from $15 per month for a person in their twenties to around $60 per month for someone in their fifties.
Of course, each insurance carrier may charge different rates depending on the policyholder's health, driving record, lifestyle, history of smoking, and other key personal risk factors.
Types of Term Insurance Policies
There are various types of term insurance besides the level term policies we've outlined so far. Each policy has its pros and cons, depending on the needs of the policyholder.
Level Term
Level term is a type of life insurance that provides you with temporary coverage lasting up to 30 years.
Your premiums remain the same each year you are insured, and the amount of life insurance provided by your policy remains level throughout the life of your level term plan.
Level term offers the lowest prices available on life insurance coverage lasting for 10 to 30 years.
Convertible Term Life
Convertible term life insurance allows a term insurance policy, which has a limited number of years before expiring, to convert into whole life or permanent insurance.
The major benefit of convertible insurance is that the policyholder doesn't have to submit to a medical exam, nor are any health conditions considered when the term policy converts to permanent insurance.
Increasing Term Life
Some policies allow you to increase the death benefit as time goes on. The premium increases as well, but it allows policyholders to pay lower premiums early on in life when they have a lot of bills and expenses.
The increasing term prevents having to qualify for another policy at an older age to get the added benefit as would be the case with traditional term insurance.
Mortgage Term or Decreasing Term
A mortgage term or decreasing term policy is the opposite of the increasing term because the death benefit amount decreases over time.
The goal is to match the decline of the term benefit to the reduction of the policyholder's outstanding mortgage. The idea behind this strategy is that you don't need as much life insurance if you have less mortgage debt.
However, although the premiums are smaller than term insurance, the premium payments remain constant even as the benefit declines.
Annual Renewable Term
As each year passes, the term insurance is renewed but for a higher premium since the policyholder is a year older.
The benefit to annual renewable term insurance is that the coverage is guaranteed to be approved each year.
However, it may not be the most cost-effective for everyone due to the increased costs over time.
Term Insurance has two Main Features that make it attractive:
A guarantee on the premium and survivor benefit for a defined amount of years, depending on the company, age of the insured, and other factors.
No capability of accumulating cash inside the policy. You can't pay an extra premium to get extra benefit. You can’t transfer money from other accounts into the policy. The carrier will not pay dividends or apply interest to your account.
This product is ideal for covering yourself for a single need, for a specific amount of time. An example is indemnifying a mortgage loan or business loan.
What is Term Insurance and Do You Need It?
The idea behind term life insurance is that you have a policy when you need it -- when your kids are young or your spouse needs your income.
By the time the term expires, your kids should be grown and you should have savings in the bank so your spouse no longer relies on your paycheck. You can also buy whole life insurance.
Is Term or Permanent Life Insurance Better?
Some financial experts advise people to go with term life insurance and invest money rather than buy a permanent policy.
However, permanent life can be a better idea. Now, one reason some suggest term life is because it costs less. Plus, a permanent life policy's investment rate can't match the stock market.
Why Buy Term Insurance?
A term plan helps you prepare for such uncertainties.
One of the most cost-effective methods by which to mitigate risk, term insurance is popular primarily because it asks for low premiums yet the family of the deceased gets the entire amount.
What is the Difference Between Term and Permanent Insurance?
Whole life insurance is a type of permanent life insurance that provides a death benefit and accumulates a cash value.
The primary difference between whole life and term insurance is the duration of the policy. A whole life insurance policy ends when you die, while a term life insurance policy lasts for a pre-determined period of time.
Should I Convert My Term Life Policy to Permanent Coverage?
That means you can make the coverage last your entire life by converting some or all of it to a permanent policy.
Most term life insurance is convertible. That means you can make the coverage last your entire life by converting some or all of it to a permanent policy, such as universal or whole life insurance.
How Long Your Term Insurance Policy Should Last?
Your policy's "Term Length" is the policy's duration. Most term life insurance policies last 10, 20 or 30 years. You want a term length that covers the entirety of your financial obligations or outstanding debts.
Understanding the "Term" of Term Life Insurance
With a term life policy, you’ll choose a term length, usually anywhere from 10 to 30 years, and pay a monthly premium in exchange for coverage. The coverage amount can vary depending on how much life insurance you need.
How Do You Convert Term to Permanent Life Insurance?
How to convert term to whole life insurance:
What is the Longest-Term Life Insurance Available?
You can now buy term life insurance with a term period of 35 years from American General Life Insurance Company. Until now, the longest-term period available was 30 years.
Does Term Insurance Pay Anything If You Cancel It?
When you cancel a term life insurance policy, you'll no longer have to pay premiums and won't be protected by the insurer, meaning no death benefit can be claimed.
Term life premiums will not be refunded when cancelling after the cooling off period.
Does Term Life Insurance End at a Certain Age?
Yes, generally term insurance policies end or expire at a certain age. The exact age depends on the particular policy, but age 70 or 85 is common.
Term insurance policies are often renewable and convertible. That means that they renew for a higher premium at the end of each term 10,20, or 30 for example.
What Does 10-Year Level Term Life Insurance Mean?
A 10-year term life insurance policy is a level benefit term life insurance policy that states that the premiums will remain fixed and guaranteed for 10 years.
Term life insurance guarantees the premiums will remain fixed for a specific number of years (10, 15, 20, 25, or 30 years).
How Many Years for Term Life?
Term life insurance is a type of life insurance that lasts a limited period of time, called a term. The most common term lengths are 10, 20, and 30 years.
However, you may be able to choose coverage lasting for a period of 10, 15, 20, 25 or 30 years depending on your age, health, budget, and the insurance company.
Features of Term Insurance
Advantages of Term Insurance
One of the primary benefits of term insurance is its lower initial cost when compared to permanent life insurance.
The reason it’s cheaper is that, with a term policy, you’re typically just paying for the death benefit, the payment your beneficiaries will receive if you pass away during the term of the policy.
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