We all want to provide our kids with an education, pay off a mortgage or debt, or simply protect our loved ones. A term life insurance is one of the two life policies that can help us achieve that goal.
A term life insurance policy is straightforward to use and lasts for a specific period (usually between 1 and 30 years). If the policyholder dies during that time, his beneficiaries get the cash benefit.
If you’ve been wondering whether to get a term life insurance policy, you are at the right place. In today’s article, we will talk about:
- What is term life insurance?
- How does term life insurance work?
- Different types of term insurance policies.
- How to buy term life insurance?
- How much does term life insurance cost?
- Who needs a term life policy?
- Pros & cons of term life insurance.
- What is the difference between term life insurance and whole life insurance?
- How to become your own bank?
After just a few minutes of reading this article, you’ll have all the answers! Let’s jump in!
What Is Term Life Insurance?
Term life insurance, also called pure life insurance, is a kind of life insurance that guarantees payment of a fixed death benefit if the insured dies during a specified term. After the term expires, it’s possible to either renew it for another term, convert it to a permanent policy, or cancel it.
When buying this type of insurance, everyone has to make two main decisions: what length it would be and how much will be the coverage amount.
People often match the length of their term life insurance policy with the financial obligation they want to cover. That includes college loans, mortgages, or buying a new home. So, for example, people with 20-year mortgage debt would probably decide to have a 20-year term policy, if not a little bit more, to make sure their debt will be paid off.
How Does a Term Life Insurance Work?
This policy’s annual costs remain the same for the level term period. After the fixed period ends, the policy can be renewed but at higher rates each year. The policy expires if the insured outlives the length of the policy and doesn’t renew it.
There wouldn’t be premiums paid into the policy unless an individual didn’t buy a return of premium term life insurance policy.
We already mentioned that many people purchase term life insurance for income replacement. In this respect, it is good to:
- Cover the years of a mortgage. That way, another borrower doesn’t have to sell the house.
- Cover other specific debts
- Cover the years during which your kids go through college. In that way, an individual can provide tuition and living expenses funds.
If the policyholder dies while coverage is in force, their family (or whoever the beneficiaries are) will receive the policy’s death benefit. The coverage ends if they outlive the policy’s term and don’t renew it.
Besides regular death benefit protection, this insurance offers an accidental death benefit. It means it will be an additional death benefit if the policyholder dies in an accident.
Some life insurance companies allow their policyholders to convert the term life policy to a permanent life policy (whole or universal life). This is an option for people that realize they no longer want temporary coverage but don’t want to buy a new policy for some reason, perhaps due to poor health conditions.
Different Types of Term Life Policies
There are a few options for term life insurance to choose from, and it’s impossible to say which one is the best because it will depend on individual situations.
Level Term, or Level-Premium, Policies
These policies grant coverage for a specified period, usually in the range of 10 to 30 years.
A specific characteristic of these policies is that the death benefit and premium are both fixed. The premium is comparatively higher than yearly renewable term life insurance due to the need to account for the increasing costs of insurance over the policy’s life.
Yearly Renewable Term (YRT) Policies
YRT policies don’t have specified terms, but they allow renewing yearly without providing evidence of insurability. The premiums are changing as the policyholder ages.
So, from year to year, the premiums increase. This is the least favored option for term coverage because premiums usually become prohibitively expensive as individuals age.
Decreasing Term Policies
With a decreasing term policy, the death benefit declines yearly, matching a predetermined schedule. For the duration of the policy, the insured person pays a fixed level premium. This policy is often used in concert with a mortgage to match the coverage with the dropping principal of the house loan.
Tip: Besides deciding which policy is right for you, remember that it’s essential to research the life insurance companies because their offers usually vary, and you want the best insurance available.
Return of Premium Term Life Insurance
This policy guarantees to refund the premiums you paid if you outlive the policy. Because of this refund feature, the return of premium term life is more expensive.
How to Get It?
Purchasing term life insurance is possible in various ways: directly from an insurance company, through an agent or broker, or even online. It’s easier to apply than for permanent life insurance.
Buying Term Life Online
Many insurers, brokerage firms, and agencies offer online purchasing. Some companies don’t use a traditional medical exam but accelerated underwriting.
It means they use algorithms to calculate life expectancy instead of in-person tests. So, it can be convenient for healthy applicants because they can skip the medical exam and get instant life insurance coverage.
Tip: Buying a policy online is a quick process that usually takes one day. That’s why it’s crucial to take time to read through the terms before finishing your purchase. Of course, if you have any specific difficulty, talk to a financial professional to get help.
Buying Term Life Insurance Policy Through Agent or Broker
This is a better option than getting a policy online if you’re unsure which type of life insurance you need. An agent and a broker is the life insurance agent who sells policies from one life insurance company.
In contrast, a broker or independent agent can sell from various companies. Choosing a captive life insurance agent is better if you want coverage from a particular insurer. At the same time, with a broker, you have the option to compare life insurance quotes from a range of insurers.
Buying Term Life Insurance Directly from Insurance Company
This is probably the most traditional way to buy your policy. An individual can go straight to an insurer and buy coverage.
With this option, the vital step is to choose your life insurance company wisely. The mandatory step should be checking the financial strength rating of the insurance company. This rating implies the insurer’s ability to pay out claims in the future. Check agencies like AM Best and S&P Global to look up those ratings.
In case the company sells products that other insurers underwrite, an applicant should check the financial strength of the company that issues the policy instead of the insurance company that sells it.
It’s possible to research an insurer’s complaint history through the National Association of Insurance Commissioners. They record complaints so everyone can see if others have problems with a specific insurance company.
How Much Does it Cost?
When purchasing a policy, age and health are the crucial factors that determine life insurance rates. Here are some examples of rates for healthy applicants.
These rates refer to healthy non-smokers with average height and weight. Besides term life insurance coverage amount and term length that affect premiums, here are some other factors that are included:
- Age
- Gender
- Height and weight
- Medical exam
- Nicotine and marijuana use
- Family health history
- Current and past health
- Driving record
- Criminal history
- History of substance abuse
- Credit
- Certain hobbies and activities
How Much Coverage Do You Need?
The advised term life insurance amount matches the financial obligations or debts a person wants to cover. Life insurance is generally used to pay expenses that the person’s salary would have paid.
Thus, when someone wants income replacement, they should calculate the approximate amount their family would need to maintain the standard of living for the specific time they wish to cover. For that purpose, some financial representatives calculate it using the Human Life Value Calculator.
Regarding policy length, the critical element to consider is the length of the debt or situation an individual wants to cover. For example, people who just bought a house and took on a 30-year mortgage are most likely to look for 30-year term life.
The length of term life insurance policy can vary from company to company, but usually, they are available in periods of 5, 10, 15, 20, 25, and 30 years. However, some companies offer longer terms of 35 or even 40 years.
Who Needs Term Life Insurance?
Of course, there are many situations when people can benefit from the term life policy, but here we highlighted the most common ones:
- Business owners who use this type of insurance to repay their debts, outstanding taxes, and other expenses for their business.
- Parents without a job can use their policy as an income replacement during the years they don’t work. Or, they can use it to pay expenses such as childcare.
- Young couples can enjoy their lower rates. They can use proceeds for anything they want – from replacing income to paying off student loans and securing future expenses.
- People with outstanding loans can benefit from the term life insurance because they will repay their debt.
Benefits and Drawbacks of Term Life Insurance Policies
As with any financial protection, term life insurance has pros and cons.
Benefits
- Easily-understood. Many people have an aversion to life insurance because it can be complicated and require the assistance of a financial advisor. For example, permanent life insurance provides features that combine interest, savings, and market fluctuations which is a lot to process for some people. In contrast, term life insurance is more uncomplicated and thus straightforward to understand and use. It simply provides a death benefit when the insured person dies within the policy term, as long as premiums are paid.
- Less expensive. Many Americans overestimate how much term life costs, usually thinking it’s over three times more expensive than it is. Term life is a budget-friendly option. It is cheaper than permanent insurance, but it also offers fewer possibilities.
- More coverage is available. After determining how much life insurance an individual needs, they are usually surprised to see the final figure is $1 million or even more. This enormous figure often terrifies people because they worry they can’t afford the coverage they need. But, it’s possible to buy $10 million (or more) in life insurance, getting the coverage a person needs in one policy at a low price.
- The death benefit is tax-free. When an insured person dies during its policy term, the beneficiary or beneficiaries will receive a lump sum from the life insurance company. Fortunately, term death benefit proceeds are tax-free, meaning beneficiaries will keep the total amount and use it as they want.
- Payment is flexible, and there are different policy options. When we speak of payment options, policyholders usually can choose to pay their premiums monthly, quarterly, semi-annually, or annually. Since most life insurers charge a processing fee if insurers don’t pay once per year, so it’s more economical to choose an annual payment. And as we already went through, there are different options to decide how long you need coverage.
- No penalty in case of canceling. If the policyholder decides to cancel their term policy while it’s active, they can do it without incurring any penalties or fees.
Drawbacks
- Limited coverage. For many people, temporary insurance isn’t the best option. Often people have permanent life insurance needs, like caring for a special needs child into adulthood or funeral costs, then a term policy won’t suit their needs.
- Doesn’t build cash value. Term life insurance policies don’t include a savings account to borrow from or withdraw money against. So, when someone cancels a term policy, they don’t get any money back. As we mentioned, the only exception is if the insured got a policy that offers a return of premium features. In contrast, permanent life insurance provides a surrender value based on the cash savings account in case of cancelation.
- Lower upper age limit. The maximum age limit varies by company and term length, but usually, it is the age of 50 for all term lengths. People 60 years old (or older) are often limited to 10 and a 20-year term. So, for them is not an available option for 30 years.
Term Life Insurance vs. Whole Life Insurance
The whole life is the best representative of the permanent life insurance policy. Permanent life insurance policies offer coverage throughout your life and the opportunity to build tax-deferred cash value.
With a permanent policy, premiums are set at a fixed rate, and you have a guaranteed death benefit. A whole life insurance policy claims paying ability of the issuing insurance company. When the waiting period expires, the policy starts to accumulate cash value. Often the policy’s cash value can be cashed out entirely.
Besides whole life, other life insurance options with permanent coverage are universal life policies and variable life.
The crucial feature a whole life policy offer is the opportunity to borrow money against your policy. This type of life insurance is designed to provide a safety net or an inheritance in the form of a death benefit.
Also, it can be used to support individuals to save and use money as they want. Thus, it’s evident that any person, despite their situation, can benefit from the whole life policy.
Permanent life insurance is indeed more complicated than term, but whole life is the easiest option in that category. Premiums remain the same for as long as the insured lives. You have guaranteed cash value, growing at a fixed rate.
The significant advantage is that the annual premiums are much higher than term life insurance premiums. Additionally, a fixed coverage amount with level premiums and benefits stays the same during a lifetime.
Key Differences
- Period of coverage. Term insurance offers a range for a specific period, while permanent insurance is for financial protection throughout life.
- Premium payments. With term life insurance, premiums are initially lower but usually increase after each renewal. With whole life insurance, premiums stay the same for as long as the policyholder lives.
- Cash value. With a whole life policy, the longer the policyholder pays into the policy, the more its cash value grows. And everyone with this policy can cash in or borrow against it and use the funds as they wish. This is probably the crucial difference because term life insurance doesn’t accumulate cash value. It is also why whole life is a better option to secure your family’s financial future.
Which One Should You Choose?
The choice depends on your situation and financial goals for the future. Our experience has shown that permanent life policies are the best option for most people. With your whole life, you have complete control and lifelong coverage. You can access and use the policy however you choose, without penalties and problems.
Also, whole life insurance isn’t connected to your employment, so you can change jobs without worrying about policy. If you choose, which we suggest, to buy a whole life policy from a mutual insurance company, you will earn dividends. Every policyholder can use their dividends in a few ways, including boosting their policy’s cash value.
Whole life works straightforwardly. After every premium payment, some amount of that money goes into the cash value component. This account is growing at a rate specified by the policy.
The ultimate reason why we always recommend whole life insurance is a process called the Infinite Banking Concept. Keep reading to find out all about it!
Be Your Own Bank
Infinite Banking Concept, also called over-funded life insurance, is the financial process that depends on a whole life policy and helps you build wealth and be financially independent. The basic idea is simple: we want to recapture the interest which will otherwise go to banks.
Nelson Nash, a founder of this concept, said that we ”finance everything you buy… you either pay interest to someone else or give up the interest you could have otherwise earned.” Thus, it’s clear – we copy the system of a traditional bank, but instead of them, we are using money from our whole life policy.
Using the Infinite Banking Concept, you can solve any financial problem you might face. You borrow it against your policy whenever you need money, and the cash value grows and earns dividends.
Break away from high-interest rates, application fees, interest charges, loan agreements, and everything else banks do to profit themselves instead of you. Thanks to the Infinite Banking Concept, you would no longer depend on a third party. Instead, you will become your own bank without limits.
Final Thoughts
There are so many life insurance policies that finding the right one for you is challenging. We hope this article helped you better understand what term life insurance is, how it works, how much it costs, how death benefit works and what are drawbacks of this life insurance plan.
Although a term life insurance policy can be helpful in some cases, there are fewer benefits compared to the whole life policy.
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