What is Term Life Insurance?
Term Life Insurance is a kind of life insurance that lasts for a set term of time. Once this period of time expires, the premium rate is no longer guaranteed, and the policy owner can either decline future coverage or reinstate coverage at an updated premium rate for a new duration of time. If the insured passes away during the term, the policy beneficiary will be paid the death benefit.
Term Life Insurance is generally the most affordable type of life insurance coverage—especially when considering the death benefit to premium rate ratio. The temporary duration of term insurance is the primary difference compared to Whole Life, Universal, and Variable Universal life insurance.
How does Term Life Insurance work?
Term Life Insurance premiums are calculated based on age, health, and overall life expectancy. Medical exams are required for some policies. The insured will be questioned about their lifestyle, whether they smoke, hobbies, occupation, and family medical history. The death benefit varies but can be as high as 20 times the insured’s yearly salary.
Many factors affect premium rates beyond the individual insured. Interest rates, state regulation, and the insurance company itself can affect the calculated premium. “Breakpoint” coverage levels of $100,000, $250,000, $500,000, and $1,000,000 tend to provide customers with better rates.
If the insured dies within the duration of the term, the insurer will pay the full death benefit to the policy beneficiary. This payment, which is generally not taxable, can be used for anything, such as income replacement, funeral expenses, children’s education, or debt. If the insured dies outside of the duration of the term, there will be no payment. The insured will have the option to renew the policy, but the previous premium rate is not guaranteed.
It is important to note that Term Life Insurance does not retain value outside of the guaranteed death benefit as opposed to Whole Life Insurance that allows policy owners to save cash within the policy. Term Life Insurance is considered to be much more affordable, which makes it ideal for those that want protection without having to invest heavily.
Types of Term Life Insurance
There are many options when it comes to Term Life Insurance—your individual situation should be considered when determining which to select.
• Level Term Insurance provides coverage for a set period of time between 10 and 30 years. The premium rate as well as the death benefit will not change throughout the policy term.
• Yearly Renewable Term Insurance does not establish a term, but instead allows policy owners to choose to renew each year without a medical exam. The premiums will change each year and the premiums will increase as the insured ages. These policies tend to become cost prohibitive as the insured ages, and therefore tends to be an unpopular choice for Term Life Insurance.
• Decreasing Term Insurance has a death benefit that will decrease each year of the policy term. The premium does not change throughout the term. These policies are great for protection for mortgages, children, and loans.
The Benefits of Term Life Insurance
The fact that many Term Life Insurance policies expire without paying a death benefit means that the overall risk for insurers is low, and the insurers are able to give that savings directly to customers by lowering premium rates. Furthermore, the low premium rate compared with the high death benefit proves Term Life Insurance to be by far the most affordable life insurance option.
Would you like to discuss Term Life Insurance?
A member of our team in Texas can help determine your needs—
please submit your contact information and we will be in touch within 48 hours.