What Is Term Life Insurance?Posted on Nov 26, 2015
It’s hard to think about your eventual death and where that will leave your family, but it’s an important topic to discuss. Before you buy a life insurance policy, you need to understand what term life insurance is and how it compares to permanent life insurance. Increasing your knowledge helps you know which type of policy to pursue.
How does Term Life Insurance Work?
The concept of term life insurance is very straightforward. Simply sign up for coverage for a fixed number of years and pay monthly or annual premiums during the coverage period. As long as you stay current with your payments, your family is entitled to benefits in the event of your death. If your needs change, most term life insurance policies can be converted to permanent life insurance with no additional underwriting.
How is Permanent Life Insurance Different?
As the name suggests, permanent life insurance provides full coverage for the rest of your life – technically, until you reach age 100. Premiums remain fixed regardless of changes in age, health or lifestyle, though rates are typically higher than term policies.
Premiums build tax-free cash value, but because of built-in fees, commissions and surrender charges if you cancel your policy, permanent life insurance isn’t the best option if you’re purely looking for a way to invest your money.
What are the Different Types of Term Life Insurance?
You must do more than choose between term and permanent life insurance; you must also decide which exact policy meets your needs best. Here’s a brief summary of the most common types of term life insurance policies.
- Select term life insurance: This option provides 10, 20 or 30 years of guaranteed benefits starting at $100,000. Premiums remain level during the initial policy term and increase annually after that.
- Return of premium term life insurance: Receive coverage for 20 or 30 years with coverage starting at $100,000. While premiums are higher than Select term life insurance, all policy premiums are returned if you outlive the policy period.
- Mortgage term life insurance: A 15- or 30-year policy is designed to pay for your remaining mortgage in the event of your premature death. The amount you choose (starting at $50,000) should be based on your mortgage balance.
- Five-year term life insurance: This is the most affordable type of life insurance you can purchase. It covers any short-term needs you have with benefits ranging from $50,000 to $99,000. You can continue to renew in five-year increments, though premiums increase as you age.
Who Should Get Life Insurance?
You might wonder if life insurance is even right for you. Consider taking out a policy if any of the following situations apply to you:
- You have a spouse and/or children who depend on your income to survive.
- You are the primary or sole income earner for your family.
- A parent or someone else depends on you for financial support, regardless of your marital status.
- You have a dangerous career or lifestyle that increases your likelihood of injury or death in an accident.
Reasons to Get Life Insurance
Regardless of the type of life insurance policy you sign up for, the benefits are great:
- Ensure your spouse and/or children are taken care of financially if you pass away.
- Enjoy additional peace of mind during the child-raising years.
- Sign up for enough coverage that your spouse could pay off the mortgage or your child could get through college, even if you’re no longer around to help pay for these things.
- Offset the financial impact of estate taxes upon your death.
- Help pay for funeral costs.