What is Term Life Insurance?
Term life insurance is an insurance policy that provides coverage for a specified period of time – usually 5 to 30 years.
It is a cost-effective way to provide financial security to one’s family in the event of death. The insurance policy pays the beneficiary of the insured a lump sum of money in the event of their death during the term of the policy.
Who is Term Life Insurance For?
Term life insurance is a cost-effective and flexible option for temporary financial protection. It can be used for paying off debts, replacing income, covering childcare expenses and educational costs. It does not have a savings or investment component which makes it a great option for those who need temporary coverage.
Young, Newlywed Couples
Young couples should consider term life coverage early, as rates are better when you’re young and healthy. Term life insurance can be used for many purposes, including income replacement, debt repayment, and future expenses such as childcare and education.
Business Owners
Business owners can use term life insurance to pay off debts, expenses, and taxes. This can be useful for transferring ownership or shares in the company. Term life insurance can also be taken out on valuable employees, known as key man insurance, with the company as the beneficiary in the event of their death.
Sole Financial Providers
Term life insurance can provide vital financial support for families who lose a sole source of income. The death benefit can be used as income replacement and to pay for expenses, childcare, and education costs.
Stay-at-Home Parents
Term life insurance for stay-at-home parents provides financial support for the working parent to continue working or stay at home with the kids. The benefit can be used for income replacement and to pay for childcare and other expenses.
Significant Debt Holders
Term life insurance can be used to pay off debts such as student loans or a mortgage upon the policy holder’s death, providing financial support for remaining family members and income replacement.
How Does Term Life Insurance Work?
The Term Life Insurance provides a death benefit in the event you pass away during the term you selected.
If you pass away before the expiration of your term, the death benefit will be delivered to your beneficiary as a single, generally tax-exempt lump sum.
Assuming that you make it to the end of the term, you have the option of:
- Terminate the policy if you no longer require coverage.
- Renew the policy for another term if you still qualify for another Term Life policy.
- Change some or all of the death benefit to a permanent policy, like whole or universal life insurance.
Types of Term Life Insurance Policies
There are two types of Term Life Insurance Policies that we recommend:
Simple Term Life Policy
Consider Simple Term Life when you want life insurance that helps you with financial obligations — but it needs to be quick, easy and convenient.
Simple Term life insurance has an automated underwriting process. In most cases, medical exams or lab tests are not required, and you may get a decision in as little as one business day.
- Coverage issued between the ages of 18 and 65 years
- 10-, 20- and 30-year level premium periods with coverage starting at $75,000
- A guaranteed death benefit that is generally income tax-free
- Guaranteed level premiums for the initial term period
- Convertible (within certain limits and regardless of health) to Whole Life coverage that builds cash value
Value Term Life Policy
When you need higher policy limits and your group life insurance from your employer is equal to one year of salary — not nearly enough to pay off the mortgage or put your kids through college.
- Coverage issued between the ages of 18 and 75 years
- A medical exam is required
- 10, 20 and 30-year level premium periods with coverage starting at $150,000 — and no maximum
- A guaranteed death benefit that is generally income tax-free
- Guaranteed level premiums for initial term period
- Conversion (within certain limits and regardless of health) to permanent coverage that may build cash value
Pros of Terms Life Insurance
Low Cost
Compared to other forms of life insurance, term life insurance is inexpensive and can be a great way to provide financial protection without breaking the bank.
Flexible
Term life insurance policies can be customized to fit the individual’s needs, with the ability to adjust the coverage amount and length of the policy.
Simple
Term life insurance policies are easy to understand. They provide a death benefit when you pass away within the policy term.
More Coverage Options
Term Life Insurance gives you the option to buy $1 million or more in coverage so you can choose the amount that helps meet your goals.
Generally Tax-Free Death Benefit
If you pass away during the policy term, your beneficiaries receive a (generally) tax-free death benefit.
No Cancellation Penalty
Cancel your coverage anytime without incurring any penalties for early termination.
Cons of Terms Life Insurance
Temporary Coverage
Term life insurance may not be suitable for those with permanent coverage needs, such as long-term care for a special needs child.
No Cash Value
Term life insurance does not build cash value, meaning it doesn’t include a savings account to borrow from or withdraw against. If you cancel a term policy, you don’t get any money back, unlike permanent life insurance which has a surrender value.
Age Restrictions
Term life insurance has a lower age limit than permanent life insurance, with most companies capping at age 50. Term options may be limited for those over 60 years old.
Term Life Insurance vs Permanent Life Insurance
Term and permanent life insurance have similarities but also significant differences. Term life insurance offers affordable premiums, no savings or investment component.
Permanent life insurance is more expensive but provides lifetime coverage and has savings and investment options, cash value, and dividends. The best coverage option depends on your needs.
Term Life Insurance FAQs
What is term life insurance?
Term life insurance is a type of life insurance that provides coverage for a specified term, usually 10-30 years. It is the most basic and affordable type of life insurance, and pays a death benefit to the beneficiaries of the policyholder if they pass away during the term of the policy.
How does term life insurance differ from whole life insurance?
Term life insurance differs from whole life insurance in that it is temporary, providing coverage for a specified term, while whole life insurance provides coverage for the duration of the policyholder’s life. Additionally, term life insurance does not have a savings component like whole life insurance does.
How is the premium for term life insurance determined?
The premium for term life insurance is determined by several factors, including the policyholder’s age, health, the amount of coverage requested, and the length of the term. Generally, the younger and healthier the policyholder is, the lower the premium will be.
Can I renew my term life insurance policy?
Many term life insurance policies can be renewed at the end of the initial term, but the premium will typically be higher due to the policyholder’s age at the time of renewal. It is also possible to convert a term life insurance policy to a permanent policy, such as whole life insurance.
Are there any tax benefits to term life insurance?
Yes, death benefits from a term life insurance policy are typically paid to beneficiaries tax-free. However, premiums paid for term life insurance are not tax-deductible.
How do I know if term life insurance is right for me?
Term life insurance may be a good option for people who need temporary coverage, such as those with young children or a mortgage. It may also be suitable for those on a budget, as it is typically more affordable than whole life insurance. It is important to consider your overall financial goals and needs before purchasing any type of life insurance. It may be beneficial to consult a financial advisor to determine if term life insurance is the best fit for you.
How long is the typical term for a term life insurance policy?
The typical term for a term life insurance policy ranges from 10 to 30 years, however some term policies are available up to 40 years as well. It is important to consider the length of the term in relation to your life stage, as the coverage needs can change over time.
Can I change the coverage amount during the term of my policy?
Some term life insurance policies allow policyholders to adjust the coverage amount during the term of the policy, but this feature may not be available for all policies and may require additional underwriting and/or medical exams. It’s best to check with the insurance company or a financial advisor before making any changes.
What are the drawbacks of Term Life Insurance?
Term life insurance is often inexpensive, but it has drawbacks. It doesn’t build cash value, has no surrender amount if you cancel and may have higher rates when renewing due to age and health. It may also not be an option for those with significant health issues.
What's the catch with Term Life Insurance?
Term life insurance only provides a death benefit while the policy is active, with no cash or surrender value if you outlive it, unless you have a return of premium policy. It can be costly to repurchase it after the term expires if you still have life insurance needs.
Who is Term Life Insurance for?
Term insurance is best for young, healthy families with temporary financial needs, but anyone with temporary financial needs can benefit from it.
Is a medical exam required?
A Simple Term Policy generally does not require a medical exam.
A Value Term Policy does require a medical exam.