Everything You Need to Know About Term Insurance

Everything You Need to Know About Term Insurance

Term life insurance offers a death benefit to beneficiaries (typically family) in the event of your death, and can be an effective way to ease your loved ones’ financial burdens. These benefits can pay off debt, replace income and even fund a child’s college education.

However, whole life and other permanent policies can also provide substantial coverage at a higher cost. Learn how to choose the right policy for your needs.

Term Life Insurance vs. Whole Life Insurance

Whole life insurance lasts for your entire lifetime, accumulating a cash value component that functions like a tax-deferred savings account. However, the premiums are significantly higher than term policies and can also increase over time.

Term policies are simple and straightforward. Most have level premiums that remain the same for your chosen term length, which can be as short as 30 years. Many mortgage, credit and group life insurance policies are term life policies.

On the other hand, whole life insurance is a complex policy that is designed as both an investment and life insurance. It may require you to take a medical exam before being approved, and the coverage will expire when the term ends unless it is renewed or converted to another permanent policy. If you do not continue paying your premiums, the policy will lapse and leave your family without any death benefits. There are other types of permanent life insurance, including universal and variable life policies, which are more expensive than whole life.

How Term Life Insurance Works

Term life insurance covers you for a specific period of time—between 10 and 30 years, usually—and pays out a death benefit if you die during that period. It’s typically the least expensive life insurance option available.

Decide how much coverage you need by considering all the things your family would struggle to pay for if you died, like outstanding debts, funeral costs and childcare expenses. You’ll also want to factor in your mortgage and any other financial obligations, like your children’s college tuition.

There are several types of term life insurance, including level term policies, which have static premiums, increasing term policies, and decreasing term life policies, where your premiums decrease over time to deliver a lower death benefit. You can also choose a return of premium term policy, which offers to return all or a portion of your paid premiums if you outlive the policy. But these policies are often 2-4 times more expensive than a standard level term policy.

Term Life Insurance vs. Permanent Life Insurance

When deciding which life insurance policy is right for you, consider your family’s specific needs. Do you need temporary coverage to help ease financial burdens, or would you rather leave behind a legacy of wealth and security for your family?

Term life insurance is the most common and affordable option, offering the ability to pay off debt, replace income, and cover expenses for a specified period. It’s also often convertible to a permanent life insurance policy.

A permanent policy lasts for your entire lifetime, providing a guaranteed death benefit to your loved ones. It can also offer a savings component that accrues cash value on a tax-deferred basis. The premiums on permanent policies remain level throughout your life, and you can borrow against the policy’s cash value if needed. A permanent policy can also offer dividends to boost the overall death benefit for your beneficiaries. There are several other types of permanent policies, including universal and variable life insurance.

Term Life Insurance vs. Convertible Term Life Insurance

Term policies typically cost less than whole life insurance and are great for covering short-term financial needs like paying off debt, replacing income or funding childcare costs. When your policy ends, you can renew it, convert it to a permanent policy or purchase another one altogether.

If you think your situation will change or your health could decline over time, a convertible term policy is worth considering. It can offer the best of both worlds by allowing you to convert your policy to a permanent life insurance policy without having to undergo a medical exam.

Generally, if you convert your term policy to a permanent policy within a certain window, you can choose any type of permanent coverage that is offered by the insurer. Depending on your situation, this could include second-to-die survivorship life insurance, which covers both you and your spouse after either of you dies. This is a popular option for couples who want permanent coverage.

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