Life insurance. It’s not something most people talk about. It’s also not something most people know terribly much about. And no, buying that cute little life insurance policy in Milton Bradley’s game of Life doesn’t count by way of legitimate life insurance education.
To get your life insurance education started in earnest, let’s begin with one of the most common types of life insurance policies. What is term life insurance? What does it cover? Do you need it? And how does term life insurance work? Read on as Covered breaks down the essentials.
What Is Term Life Insurance?
Term life insurance is a type of life insurance that pays out death benefits for a set period of time… the “term.” The length of the term varies; typical policy terms include 10, 20, 25, or 30 years.
Term life insurance is also known as “pure” life insurance. It’s often explained by contrasting it with permanent life insurance (aka “whole” life insurance). Since that’s actually a helpful and marvelously illuminating way to go, we’ll do it, too! Below are the basic differences.
|Term life insurance policy||Permanent life insurance policy|
|How long does coverage last?||Stated term (set number of years)||Entire lifetime of covered person|
|How much does it cost?||Usually less expensive premiums||Usually more expensive premiums|
|How are premiums decided?||Based on age, gender, and health||Based on age|
|Do the premiums increase?||Maybe (but not necessarily)||No|
|How much does it pay out?||Typically more than permanent||Typically less than term|
|Does it have any cash value?||No||Yes, accumulates interest over time|
|Can I take out a loan on its value?||No (has no cash value)||Yes|
|Can the policy be renewed?||Maybe, depending on policy||NA|
|Can the policy be converted?||Maybe possible to convert to permanent on term expiration||No, not convertible to term|
In other words, term life insurance is a relatively affordable and flexible type of life insurance policy. The limited terms reduce insurers’ risk that they’ll have to issue a payout — as opposed to permanent life insurance policies, which are designed to always offer an eventual payout.
That’s why term life insurance policies tend to have lower premiums and higher death benefit payouts. Insurers can afford to gamble that they won’t need to pay out death benefits for many (if not most) of the term life insurance policies they sell.
To learn more about different types of life insurance, check out the National Association of Insurance Commissioners’ overview. To go deeper, check out the Insurance Information Institute’s extensive list of helpful articles on life insurance.
What Does Term Life Insurance Cover?
Unlike homeowners and auto insurance — with all their different coverage types, levels, minimums, variables, and exclusions — term life insurance coverage is simple. If the person covered by the term life insurance policy dies during the term indicated, the policy guarantees payment of a death benefit to the beneficiary. If the covered person outlives the term, however, no death benefit payment is made.
Of course, term life insurance coverage only applies if premiums are paid. If premium payments have lapsed, coverage also lapses.
As with other types of insurance, you can add riders to term life insurance policies. Riders provide additional coverage under certain circumstances. Common life insurance riders include accidental death and dismemberment (AD&D), chronic illness, critical illness, long-term care, and accelerated death benefit. Talk to your life insurance advisor about how these riders work and whether they may be right for you.
Some term life insurance policies also offer a “return-of-premium” option. With those policies, premium payments are returned to the covered person if they’re still alive when the policy term ends. Unsurprisingly, premiums for return-of-premium policies tend to be much higher.
Who Needs Term Life Insurance?
Given its affordability, term life insurance can be a good idea for just about anyone. The death benefit it pays can be sizable. And when someone dies, there are always several reasons money is needed. For example, beneficiaries may wish to use the death benefit payout for:
Funeral, burial, or cremation costs
Settlement of outstanding debts
Income replacement (i.e., counteracting loss of employment income)
Education or child care expenses
Long-term care expenses
Taxes (e.g., estate taxes, inheritance taxes)
Inheritances for those left behind
Death is never easy on the loved ones who survive. Knowing that they’ll receive a payout that will alleviate financial pressures can be a tremendous comfort, both to policyholders and their beneficiaries.
With all that said, term life insurance can be particularly beneficial to people with children. Obviously, if parents pass away while children are still young, the impact from loss of income can be considerable. While it’s terrible to imagine a scenario in which a child loses a parent early in life, that term life insurance death benefit could be sufficient to finance the child’s entire college education.
What Else Do I Need to Know About Term Life Insurance?
One very important thing to know: Premiums for ANY type of life insurance policy are cheaper when you’re younger and in good health. As you age, the risk that insurers may need to pay out on your policy increases; hence, as you age, your premiums increase. Life insurance premiums for older people, or people in poor health, can quickly become prohibitively expensive.
Finally, it’s worth noting that many people choose term life insurance policies over permanent because they don’t feel they need lifelong coverage. Most people tend to have fewer expenses as they age, as mortgages are paid off and kids grow up and become financially independent. People also tend to amass greater income and savings as they age.
Is term life insurance right for you? Before you take the plunge on purchasing a life insurance policy, we encourage you to talk to a licensed life insurance advisor. They can help you understand what your options are based on your age, health, and other life circumstances.
Covered is excited to announce our new partnership with Covr Tech. They can help you secure Life Insurance. Get started with your Life Quote or talk to one Covered’s independent advisors at (833) 487.2683.