Term Life Insurance
What You Need to Know
Securing the financial future of your loved ones has never been easier, and term life insurance is your key to that peace of mind.
With term life insurance, you have a cost-effective solution that assures your family’s financial stability if you’re no longer there to support them. It’s about ensuring they are well-cared for, even in the face of the unexpected.
Picture a future where, no matter what happens, your family can live comfortably, continue their education, or maintain their lifestyle. That’s what term life insurance offers.
And it’s far better than the alternative of relying on GoFundMe life insurance.
Table of Contents
- Term Life Insurance What You Need to Know
- How Does Term Life Insurance Work?
- Advantages of Term Life Insurance
- Disadvantages of Term Life Insurance
- Choosing the Right Term Length
- How to Choose the Right Term Length
- Group Life vs. Term
- Term Life vs. Universal Life Insurance
- Mortgage Life Insurance or Term Life
- Term Life Insurance vs. ROP
- Final Words
How Does Term Life Insurance Work?
Term life insurance is a type of life insurance that offers coverage for a specific length of time.
The term length can range from 1 to 40 years, depending on your chosen company.
The death benefit is paid to your beneficiaries if you die while the coverage is in force.
Term life insurance provides a death benefit if you die from natural causes, health issues, or accidental death.
During the level period, your premium and death benefit remains fixed.
When the level term period ends, your life insurance is still available with most companies as an annual renewable term.
What happens to your term policy at the end of the term varies by company. Some companies keep the death benefit the same but increase your yearly premium.
Other insurers decrease your death benefit at the end of the term and lower the premium.
Consider the following comparison from 6/13/2023 of a policy that increases the premium at the end of the term vs. a policy that decreases the coverage amount at the end of the term – Female, age 45, preferred best rates, $1 million – 20-year term.
- Premium Increase at End of Term
- Protective Life
- Death Benefit = $1,000,000
- Year 1-20 Annual Premium = $775
- Year 21 Premium = $3405
- Year 21 Death Benefit = $1 Mil.
- Year 30 Premium = $42,475
- Year 30 Death Benefit = $1Mil.
- Death Benefit Decrease at End of Term
- AIG – Corebridge Financial
- Death Benefit = $1,000,000
- Year 1-20 Annual Premium = $780
- Year 21 Premium = $780
- Year 21 Death Benefit = $50,000
- Year 30 Premium = $2464
- Year 30 Death Benefit = $50,000
As you can see, each option has its advantages and disadvantages. The reality is that most people will not keep the policy beyond the level term period.
If anything, you would convert your life insurance to a permanent policy before the term ends.
Most policies pay a lump sum at death, but other life insurance settlement options exist.
This is an ideal type of insurance when you want the most coverage for the lowest price.
Does term life insurance have cash value? We now have a company that offers this.
Term can be used in some pension max situations, but it needs to be thoroughly reviewed before considering this.
We even make it easy by offering companies with accelerated underwriting and no-exam life insurance for $500k – $3 million.
Advantages of Term Life Insurance
Why choose term life insurance over other forms of life insurance? For starters, term life insurance is often the most affordable, making it accessible to many individuals.
The premiums are lower than those of whole life insurance and universal life since the term policy doesn’t accumulate a cash value and only covers a specific term.
In addition, term life insurance is straightforward.
It provides a death benefit and doesn’t involve investment components or cash values. This simplicity makes it easy to understand, making it a good option for first-time life insurance buyers and those seeking a death benefit.
Moreover, term life insurance offers flexibility.
You can choose the length of the term based on your family’s needs and financial situation.
For example, if you have young children, you might want a policy that lasts until they are financially independent.
Similarly, suppose your spouse needs help managing the mortgage. In that case, a term policy that lasts until the mortgage is paid can offer substantial peace of mind.
Disadvantages of Term Life Insurance
The biggest disadvantage of term life insurance happens when you reach the end of your level term but realize that you still need coverage.
If you’ve developed health issues since buying your policy, new coverage may not be affordable.
And as we previously mentioned, maintaining coverage when it reaches the annual renewable phase can be costly.
Choosing the Right Term Length
There is no one-term-length-fits-all answer.
Choosing the proper term for your term life insurance is critical. You want to ensure you’re covered when your loved ones are most financially vulnerable.
According to life insurance statistics, the 20-year term life policy is the most common, but that may or may not be your best option.
The duration of coverage depends on your specific needs and situation. You probably have multiple reasons for buying coverage, from mortgages, income replacement, education, etc., and you have to think about how long those obligations will be around.
Life insurers offer many durations, including:
- 1 Year Term
- 5 Year Term
- 10 Year Term
- 15 Year Term
- 20 Year Term
- 25 Year Term
- 30 Year Term
- 35 Year Term
- 40 Year Term
One life insurer, AIG – Corebridge Financial, offers 16 – 30 years durations in one-year increments.
In most cases, your policy becomes an annual renewable policy at the end of the level period.
And while most companies allow you to renew up to age 90-95, the price jumps dramatically, and/or the death benefit decreases to a fraction of the original policy.
Bottom line – Choose your term length carefully because you won’t keep the policy when the term ends.
How to Choose the Right Term Length
When you buy a new policy, choosing the correct term length is essential because you can’t change it later.
Consider these points before choosing:
- Match your term to the duration of time you need coverage
- Maybe buy multiple term lengths if your needs vary
- Consider terms slightly longer than your expected need
- Don’t forget that price increases with longer terms.
- Take the time to properly determine your life insurance needs.
If you have a mortgage, consider a 30-year policy.
You can buy multiple policies with different term lengths or one with riders to accomplish the same.
Are you looking for coverage to replace your income?
Plan on retiring in 15 years? Take a look at 20-year terms, in case you keep working.
We recommend our Life Insurance 101 guide if you need a quick overview of the application process.
While conversion is rarely used, it’s essential to have it if you develop health issues.
The reason why is that you don’t need to go through medical underwriting again.
Some companies offer conversion for the entire level term period, while others limit the conversion period available.
If you are a senior by the time your level term ends, pay attention to the conversion privilege in case you need it.
Most policies offer additional benefits such as accidental death, child coverage, accelerated benefits, etc.
For detailed information, check out our guide – Life Insurance Riders
Group Life vs. Term
There is no comparison.
You own and control term life, while your employer controls group life.
Leave your job or lose your job, and you lose your group coverage.
No big deal, right? If you develop a significant health issue, you may have problems.
When comparing term life insurance quotes vs. group life insurance, look at the pros and cons of each.
Group life insurance Pros vs. Cons
- Easy application process
- No health questions for base coverage
- Paid for by the employer
- Coverage may increase with salary
- Some policies are portable if you leave
- May allow conversion to permanent insurance
- Rate increases every five years
- Additional coverage requires medical review
- The employer may cancel the plan
- If you leave your job you can lose coverage
- Some policies are not portable
- Permanent policy pricing may not be favorable
Term Insurance Pros vs. Cons
- You have 100% control over policy
- Premium is fixed for the term length chosen
- Conversion options are more favorable
- Pricing is more favorable at greater coverage amounts
- Underwriting may take 6-8 weeks
- A paramedical exam may be required
- Health issues may be costly
With group life insurance, the base amount given to employees for free is great and should be accepted.
If you are looking at supplemental group coverage like the AICPA offers, compare that to an individual policy.
While not a group policy. Costco term life insurance is available to members.
Term Life vs. Universal Life Insurance
Universal life insurance is permanent life insurance that can potentially accumulate cash value.
There are many variations of universal life insurance available, including:
- Index Universal Life
- Guaranteed Universal Life (GUL)
- Cash Value Accumulation Universal Life
- Survivorship Universal Life
On the other hand, a guaranteed universal life (GUL) works similarly to a term life policy. The GUL provides a guaranteed death benefit (to age 120 with some policies) with little cash value.
Mortgage Life Insurance or Term Life
When comparing term vs. mortgage life,
The premiums for both policies remain level for the term.
The difference concerns the coverage amount and how it gets paid out.
Mortgage life insurance coverage decreases yearly with your mortgage, but your premium remains level.
The death benefit gets paid directly to the mortgage company if you die.
On the other hand, a term life insurance policy has a level premium and death benefit.
Furthermore, the proceeds get paid to the beneficiary you name, such as your spouse.
For other loans, such as a business loan, a level term life with a collateral assignment ensures the bank only receives what is owed, with the balance to your beneficiaries.
Term Life Insurance vs. ROP
If you like getting money back from your term life, an ROP – Return of Premium policy may be a good fit.
With the ROP term, the life insurer refunds all premiums you paid at the end of the term.
ROP may sound like a good deal (and it can sometimes be), but remember that your ROP will be more expensive.
If you have longevity in your family history, ROP may be a good option when you outlive your term.
Underwriting for most life insurance policy types is similar, although some policies allow you to skip the life insurance medical exam.
Term life insurance is worth it because it provides the most coverage for the lowest price compared to whole life or universal life insurance.
The best term life insurance is the policy that provides you with the amount of coverage you need and the duration you need term life insurance.
Term life insurance is temporary, providing coverage for a specified duration, while whole life insurance builds cash value and can last a lifetime.
If you outlive your term life insurance, your beneficiaries receive nothing. But keep in mind two things. First, your term life insurance is most likely convertible to permanent life insurance before the level term period ends. And secondly, even when the level term period ends, most term policies become an annual renewable term to age 95.
When your term life insurance expires, you may have a couple of options, including converting your policy to permanent life insurance, replacing your policy with a new term policy, lapsing your policy, or selling your term policy for a lump sum of money.
No, term life insurance does not have a cash value. Some term life policies offer a return of your premium if you cancel the policy.
Group term life insurance is the coverage offered by your employer. Most employers have a base amount of life insurance provided to all employees and an additional amount that employees may purchase.
You may be able to sell your term life insurance policy if you are older (age 65+), the policy has a conversion privilege available, and your health has declined. It’s called a life settlement.
Term life insurance is not taxable in most situations. There are some instances (typically for business insurance cases) where they may be a tax question. Always consult your accountant for tax advice.
Term life insurance provides financial protection for your loved ones, securing their future in the event of your untimely death. Its simplicity, affordability, and flexibility make it a choice for many.
Remember, it’s crucial to understand what term life insurance means and how it works before committing to a policy. Take the time to compare term life insurance quotes and consider each company’s different features and benefits to ensure you’re making an informed decision.
Armed with the correct information and a clear understanding of your needs, you’ll be well on your way to finding the term life insurance policy that offers peace of mind and the protection your family deserves.
Request a quote, and we’ll help you select a policy tailored to your needs and budget.