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An affordable and straightforward policy that’s the right choice for most people.
Life insurance offers your family financial protection if you die and are no longer there to provide for them. When you're looking for a policy, you want to make sure that you're getting the best possible coverage at the best possible price. That's where term life insurance comes in. Term life is essentially a no-frills life insurance policy; it ensures your loved ones have a financial safety net without breaking the bank.
Got questions? We've got you covered. Read on to learn everything you need to know about term life insurance.
IN THIS ARTICLE
Term life insurance lasts for a specific period of time — known as the term — before expiring. If you die before the term is up, your beneficiary — usually your family — receives a death benefit as a tax-free lump sum of money that can be used for funeral costs, to pay bills, or for any other use.
Term life insurance is very straightforward. There are only a few things you need to know to get started in understanding it.
|TERM LIFE INSURANCE POLICY FEATURES|
|Average Duration||10-30 Years|
|Guaranteed Death Benefit?||Yes|
Due to its simplicity and affordability, purchasing term life insurance is one of the most popular ways to create a financial safety net. However, other types of life insurance can be a better fit for individuals with specific circumstances, such as lifelong dependents or a high net worth. Speaking to a life insurance adviser is the best way to determine what type of policy is the best fit for you.
The primary element of term life insurance that sets it apart from other types of life insurance is the term – how long the policy is in effect.
Term periods usually last anywhere from 10 to 30 years, and you pay a monthly or annual premium during this time to keep the policy active. Once the term is up, you no longer pay the premiums and the policy expires.
Depending on the type of term life insurance you have, the premiums can:
The purpose of life insurance is to protect your loved ones from financial obligations if you’re not around to provide for them.
When you’re still saving for retirement, paying off a mortgage, or raising children and planning on sending them to college, life insurance makes sense. But eventually you’ll have saved for retirement through a 401(k) or IRA, you’ll have paid off your mortgage, and your kids will be out of the house with families of their own.
So why pay for life insurance when there are few – or no – financial obligations to account for?
The fact that term life insurance expires, and there are no additional fees associated with it, is what makes it the most affordable life insurance option. Don’t fret that your life insurance policy expires: that should be part of the plan.
If you outlive your term life policy, the policy expires and you are no longer covered. You have several options after that:
If you die while your life insurance policy is still in force, your beneficiaries receive a tax-free amount of money called the death benefit which can be paid out all at once or over the course of their lifetime.
While term life insurance is the most basic, straightforward type of life insurance, there are still variations on it so you can get the insurance policy that fits your needs. These include:
Most insurance shoppers will need to decide between buying term life insurance or whole life insurance.
The main differences in term life insurance vs whole life insurance are:
Unlike whole life insurance and other forms of permanent life insurance, term life policies don’t come with a tax-deferred savings component called the cash value. The cash value of a permanent life insurance policy accrues interest and can be used by the policyholder while they are still alive.
According to Policygenius data, whole life insurance is five to 15 times the cost of comparable coverage with term life insurance because of the cash value and associated fees. For this reason, whole life isn't the right choice for most people. It can be useful for people with complex financial plans, but a majority of people will benefit more from a simple term life insurance policy that they can afford.
Since term life insurance protects your family for a set period of time while they’re still depending on your income and not for your entire life, term life insurance rates are much cheaper and offer more affordable financial protection than permanent policies like whole life insurance. The rates below are reflective of Policygenius quoting data, and are averaged from our eleven insurers that offer term life insurance policies: AIG, Banner, Brighthouse, Lincoln, Mutual of Omaha, Pacific Life, Principal, Protective, Prudential, SBLI, and Transamerica.
|AGE||MONTHLY COST FOR A POLICY WITH A $250,000 DEATH BENEFIT||MONTHLY COST FOR A POLICY WITH A $500,000 DEATH BENEFIT||MONTHLY COST FOR A POLICY WITH A $750,000 DEATH BENEFIT||MONTHLY COST FOR A POLICY WITH A $1,000,000 DEATH BENEFIT|
Methodology: Sample monthly premium rates based on 20-year term life insurance policy for a non-smoker male in Preferred health rating; term life insurance quotes based on policies offered by Policygenius in 2020.
In general, life insurance costs are determined by:
Because age is one of the major deciding factors in a life insurance policy’s cost, it’s important to know how term life insurance rates increase by age when you’re deciding when to buy and what type of coverage you should get.
Life insurance riders are supplemental coverage that you can add on to your term life insurance policy and often offer financial protection even while you are still alive. Some life insurance riders can be exorbitantly expensive and aren't worth the additional cost — but still, some can be a beneficial policy add-on.
What is the best term life insurance company for you? That depends on your specific situation. Most people prefer to choose the insurer that offers the best price and that’s a good starting point. However, you should also consider a company’s customer service record, ratings from J.D. Power, A.M. Best and the Better Business Bureau, and what tasks you can do online versus on paper or over the phone, for your convenience. You should also take into account how each company treats certain health conditions and lifestyle choices. This can make a huge difference in the final cost of your term policy. Policygenius conducts a robust review of the top life insurance companies to determine where they stand.
Besides health and age, you need to take into account the amount of coverage a term life insurance policy provides to determine the final cost. You want to keep the policy affordable (there’s no point in having a policy that you won’t be able to pay for) while still making sure your family will be able to cover their financial needs.
When deciding how much term life insurance you need, you should take into account:
In general, your term life insurance policy should last as long as your longest debt (usually a mortgage) and should cover any remaining costs when you subtract your debts from your existing assets.
Of course, you don’t need to crunch all the numbers by hand. You can use our free life insurance calculator to get a tailored recommendation for the term length and coverage amount that would be best for you.
Wondering if term life insurance is right for you? Consider the potential pros and cons of term life compared to permanent policies:
|Pros of term life||Cons of term life|
|Cheapest life insurance option||Coverage doesn’t last your entire life|
|Lasts for a set period of time so you aren’t paying for coverage you don’t need||Doesn’t provide a cash-value component|
|Provides enough financial assistance to pay off debts, cover future costs, and provide a financial safety net|
Each life insurance company is different and the best way to get the right life insurance policy for you is to shop around with an independent broker who does the shopping around for you, like Policygenius. An agent can help you find a life insurance company that offers you the best premiums based on your individual circumstances, whether you have a risky hobby like scuba diving or are young and healthy.
After working with an agent to find the best life insurance policy for you, you'll go through the underwriting process so the insurer can evaluate your background and determine your health classification, which sets your life insurance premiums. You won't officially have coverage until you sign your policy's documents and pay your first policy premium.
Short answer: Yes. Term life is the right option for most people. If you have anyone who is financially dependent upon you, and you don’t have enough money set aside to provide for their financial needs should you die tomorrow, then life insurance is absolutely worth it. It should be your top insurance priority. And since term life insurance is cheaper and simpler than permanent policies, it’s easier to fit it into both your present-day budget and your long-term financial strategy.
About the author
Nupur Gambhir is an insurance editor at Policygenius in New York City. Previously, she has worked in marketing and business development for travel and tech. She has a B.A. in Economics from Ohio State University.
Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.
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