Term life insurance, also called pure life insurance, is a type of death benefit that pays the policyholder’s heirs for a set amount of time after the policyholder dies.
Once the term is over, the person with the policy can either renew it for another term, change it to a permanent policy, or let it lapse.
What happens with term life insurance
When you buy term life insurance, the premium is based on the policy’s value (how much it will pay out) and your age, gender, and health.
In some situations, you may need to get a medical exam. The insurance company may also ask about your driving record, the medicines you take, whether or not you smoke, your job, your hobbies, and your family history.
If you die during the policy term, the insurance company will pay the face value of the policy to the people you choose. Most of the time, this cash benefit is not taxed, so it can be used to pay for things like health care and funeral costs, consumer debt, or mortgage debt.
You don’t get any money if the policy runs out before you die. You might be able to renew a term policy when it runs out, but the premiums will be recalculated based on how old you are at that time.
Whole life insurance and term insurance
Besides the guaranteed death benefit, term life insurance has no other value. There is no way to save money, like with whole life insurance.
Term life insurance is usually the least expensive because it only pays out when the policyholder dies. As of 2021, a healthy 35-year-old man who doesn’t smoke could get a whole life insurance policy with a payout of $500,000 for about $28 per month. At age 50, the monthly premium would go up to $71.
Depending on the insurance company, the premiums for a whole life equivalent could be $200 to $300 per month or even more.
Most term life insurance policies end before the death benefit is paid out. Compared to a permanent life policy, the insurer’s overall risk is less. Insurance companies can charge lower premiums because the risk is lower.
Premiums can also be affected by interest rates, the financial health of the insurance company, and state laws. Generally, companies offer better rates at the “breakpoint” coverage levels of $100,000, $250,000, $500,000, and $1,000,000.
Term Life Insurance: An Example
Thirty-year-old George wants to protect his family in case he dies too soon, which isn’t likely. He buys a $500,000 10-year term life insurance policy with a $50-per-month premium.
If George dies before the ten years are up, George’s beneficiary will get $500,000. If he dies after he turns 40, his beneficiary will receive no benefit when the policy has expired. And if he keeps the policy, the premiums will be higher than when he first got it because they will be based on his current age of 40 instead of 30.
If George is diagnosed with a disease that will kill him during the policy’s first term. He probably won’t be able to renew it when it runs out. Some policies offer guaranteed re-insurability without having to show proof of insurability, but when they do, they cost more.
How Term Life Insurance Works
Term life insurance comes in different forms. The best choice for you will depend on your specific situation.
The Level-Premium Policy or Level-Term Policy
These cover you for a period of 10 to 30 years. The premium and the death benefit are both sets.
Because actuaries must consider how much insurance costs will go up over the policy’s life. The premium is higher than it would be for yearly renewable-term life insurance.
The Policy for Annually Renewable Terms (YRT)
Yearly renewable term (YRT) policies don’t have a set time, but they can be renewed yearly without showing proof that you can be insured.
As the insured person gets older, the premiums go up each year. There is no set length of time, but as the policyholder ages, the premiums can become so high that they are no longer affordable.
The policy of making terms shorter
The death benefit on these policies goes down every year according to a set schedule. The person who has the policy pays a fixed, level premium for as long as the policy is in effect.
Decreasing term policies are often used with a mortgage. The policyholder matches the insurance payout to the home loan’s decreasing principal.
What’s good about term life insurance?
People who are young and have children like term life insurance. For a low price, the parents can get a lot of coverage. If the family needs it, the payout can compensate for lost income.
These policies are also good for people with families that are growing. They can expect to need coverage until their children are grown up and can take care of themselves.
Term life insurance can be just as helpful to an older surviving spouse as it is to a younger one. Due to the higher costs of premiums for older policyholders, however, there may be better ways to take care of a surviving spouse.
Term life insurance has an age limit set by the insurance company. This is between 80 and 90 years old.