Term Life Insurance: Definition, Types, Advantages, and Disadvantages

What is Term Life Insurance?

Term life insurance gives a death benefit to the policyholder’s dependents over a predetermined time period.

Once the term ends, the policyholder may renew it for another term, convert it to permanent coverage, or let the term life insurance policy lapse.

KEY TAKEAWAYS

  • period life insurance assures that if the insured person dies within the given period, the insured’s beneficiaries will receive a stipulated death benefit.
  • These plans have no value other than the guaranteed death payout and do not include a savings component (like permanent life insurance products).
  • Term life premiums are calculated using a person’s age, health, and life expectancy.
  • Depending on the insurance provider, it may be possible to convert term life to whole life insurance.
  • Term life insurance plans may be purchased for 10, 15, 20, or more years and are often renewable for an extra term.

How Does Term Life Insurance Work?
When you get term life insurance, the insurance company calculates the premium based on the policy’s value (the payment amount) and other characteristics such as your age, gender, and health. Other factors influencing rates include the company’s operational expenditures, the amount it makes from its investments, and death rates at each age.

In certain circumstances, a medical checkup may be necessary. The insurance provider may also ask about your driving record, current medicines, smoking status, work, hobbies, family history, and other relevant information.

If you die within the policy’s term, the insurer will pay the face value to your beneficiaries. Beneficiaries may utilize this cash benefit, which is normally not taxed, to pay for your healthcare and funeral expenditures, as well as consumer and mortgage debt. Beneficiaries are not compelled to utilize the insurance funds to pay the deceased’s debts.

If the insurance expires before your death or you live over the policy’s term, there will be no payment. You may be able to renew a term insurance when it expires, but the rates will be adjusted depending on your age at renewal.

Cost of Term Life Insurance
Term life insurance is often the least expensive kind of life insurance available since it provides a death benefit for a limited period and does not include a cash value component, as permanent insurance does. According to Insureon statistics, a healthy non-smoking guy aged 30 may purchase a 30-year term life insurance policy with a $500,000 death benefit for an average of $30 per month in February 2023. At age 50, the premium would increase to $138 per month.

Term Life Insurance Rates

$500,000 CoverageAverage Monthly Cost, MaleAverage Monthly Cost, Female
30 years old$30$25
40 years old$52$42
50 years old$138$101
55 years old$241$180

In comparison, below are the rates for a $500,000 whole life insurance (which is a permanent policy that lasts your whole life and includes cash value). As you can see, the same 30-year-old healthy guy would spend an average of $282 every month. At fifty, he’d pay $571.

Whole-Life Insurance Rates

$500,000 CoverageAverage Monthly Cost, MaleAverage Monthly Cost, Female
30$282$247
40$382$352
50$571$498
60$887$782

Most term life insurance plans expire without providing a death payment. This reduces the total risk to the insurer as compared to a permanent life insurance. Reduced risk is one reason that enables insurers to charge cheaper rates.

Interest rates, the insurance company’s finances, and state restrictions may all have an impact on premiums. In general, firms often provide better rates at the “breakpoint” coverage levels of $100,000, $250,000, $500,000, and $1,000,000.

Example of Term Life Insurance.

Thirty-year-old George wishes to safeguard his family in the improbable event of his premature demise. He buys a 10-year, $500,000 term life insurance policy with a monthly payment of $50.
If George dies during the policy’s 10-year term, his beneficiary will get $500,000. If he dies after the insurance expires, his beneficiary will not get any benefits. If he lives and renews the policy after ten years, the premiums will be greater than the original policy since they would be based on his current age of 40 rather than 30.

If George is diagnosed with a terminal disease during the first policy term, he will most likely be unable to renew when the policy ends. Some policies provide assured re-insurability (without evidence of insurability), however these benefits come at a greater cost.

Types of Term Life Insurance

There are several forms of term life insurance. The best solution will depend on your specific circumstances. Most corporations provide durations ranging from 10 to 30 years, with a handful offering 35 and 40-year contracts.

Level Term or Level Premium Policy

Level-premium insurance requires a set monthly payment for the duration of the policy. The majority of this essay has been on term life insurance, which has a flat premium. As previously stated, this sort of insurance typically covers coverage for ten to thirty years. The death benefit is similarly set.

Because actuaries must account for rising insurance costs throughout the course of the policy’s effectiveness, the level premium is much greater than annually renewing term life insurance.

Yearly Renewal Term (YRT) Policy

Yearly renewable term (YRT) policies are one-year policies that may be renewed annually without giving proof of insurability.

The rates climb year after year as the covered individual aged. As the insured aged, his or her premiums may become excessively costly. However, they may be a decent solution for someone who needs temporary insurance.

Decreasing Term Policy

These plans feature a death benefit that decreases annually according to a specified timetable. The policyholder pays a set premium for the length of the policy.

Decreasing term plans are often used in conjunction with a mortgage, with the policyholder matching the insurance payment to the decreasing principle of the house loan.

Advantages of Term Life Insurance

Term life insurance appeals to young individuals with children. Parents may acquire comprehensive coverage at a cheap cost, and if the insured dies while the policy is active, the family can use the death benefit to replace lost income.

These rules are also appropriate for individuals with increasing families. They can keep the necessary coverage until, say, their children reach maturity and become self-sufficient.

A term life benefit may be equally beneficial to an older surviving spouse. However, persons who wait until they are older to seek for insurance will pay greater rates than if they had purchased a level-term coverage when they were younger.

Each insurance company has a maximum age for its term life coverage. This typically spans from 80 to 90 years old.

Term life insurance vs permanent life insurance.

The primary distinctions between a term life insurance policy and a permanent insurance policy (such as whole life or universal life insurance) are the policy’s length, the building of cash value, and the cost. Your preferences will determine which option is best for you. Here are some factors to consider.

Premium Costs

Term life insurance plans are suitable for customers who desire a lot of coverage for a reasonable price.

People who hold whole life insurance pay more premiums for less coverage, but they know they are covered for the rest of their lives.

People who get term life insurance pay payments for a lengthy period of time but receive no benefit unless they die before the term finishes. Additionally, term life insurance rates rise with age.

Availability of coverage

Unless a term insurance is guaranteed renewable, the business may refuse to renew coverage at the conclusion of its term if the policyholder develops a serious disease. Permanent insurance offers coverage for life as long as the payments are paid, regardless of the insured’s health status.

Investment value

Some clients choose permanent life insurance since the contracts sometimes include an investment or savings vehicle. A percentage of each premium payment is dedicated to the cash value, which typically increases while the policy is in place. Some plans offer dividends, which may be paid out in cash or kept on deposit inside the policy.

Over time, the cash value may increase to the point where it may cover the coverage premiums. There are also various distinct tax advantages, including tax-deferred cash value growth and tax-free access to the cash part.

However, financial counselors caution that the growth rate of a cash-value insurance is generally low when compared to other financial products such as mutual funds and exchange-traded funds (ETFs). Also, high administrative expenses often reduce the rate of return. This is the origin of the expression, “buy term and invest the difference.” Permanent insurance, on the other hand, has a consistent performance and is tax-efficient, offering extra advantages when the stock market is erratic.

Other Factors

There is no one-size-fits-all solution to the term vs. permanent insurance argument. Other aspects to consider are:

  • Is the rate of return on investments sufficiently appealing?
  • Does the permanent insurance have a borrowing provision and other features that allow you to access the cash value over your lifetime?
  • Does the policyholder own or plan to own a company that needs insurance coverage?
  • Will life insurance play a part in tax sheltering a large estate?

Comparing Term Life Insurance with Convertible Term Life Insurance

Convertible term life insurance is a term life policy with a conversion rider. The rider ensures the opportunity to change an active term policy—or one about to expire—to a permanent plan without going through underwriting or showing insurability. The conversion rider should enable you to change to any permanent policy offered by the insurance provider without limitation.

The rider’s key characteristics are that it keeps the term policy’s original health rating upon conversion (even if you subsequently develop health difficulties or become uninsurable) and allows you to choose when and how much coverage to convert. The premium for the new permanent coverage is based on your age upon conversion.

Of course, total rates will rise dramatically since whole life insurance is more costly than term life insurance. The benefit is that approval is assured without requiring a medical evaluation. Medical issues that occur during the term life period cannot cause premiums to rise. If you wish to add additional riders to the new policy, such as a long-term care rider, the firm may need either restricted or full underwriting.

Which is better: term or whole life insurance?

It depends on your family’s requirements. Term life insurance is a low-cost solution to leave a lump sum to your dependents in the event of your death. If you are young, healthy, and support a family, it may be a viable alternative. Whole life insurance has much higher monthly rates. It is intended to offer coverage for your whole life. As the coverage matures, the policy’s value increases, and the policyholder may take funds for any reason. Thus, it may be used as both an investment instrument and an insurance policy.

Do you get your money back at the end of a term life insurance policy?

If you are still living when the term ends, your term life insurance policy will not pay out. If you die, only your beneficiaries will get the death benefit. That is why term life insurance is so affordable. Most individuals outlast their term life insurance contracts.

Can a Senior Citizen Get Term Life Insurance?

It depends on their age. Insurance companies specify a maximum age for term life insurance plans. This is often between 80 and 90 years old, but might vary depending on the firm. The premium also climbs with age, so someone in their 60s or 70s would pay far more than someone many decades younger.

The Bottom Line

Term life insurance is a cost-effective choice for those who cannot afford the higher monthly rates of whole life insurance.

Term life insurance is comparable to vehicle insurance. It is statistically rare that you will need it, and paying the premiums is a waste of money if you do not. However, if the worst occurs, your family will get rewards.

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