Before we discuss the different varieties of term life policies available, let’s briefly go over what life insurance is, and its different components.
Life Insurance Basics
Life insurance is a way for you to invest in your beneficiaries’ futures. If you have financially dependent loved ones, you’ll want to make sure they can get by without you. With a life insurance policy, your beneficiaries will receive death benefits if you pass away.
You can invest in either a whole or term life policy. A whole life, also known as permanent life, policy is exactly what it sounds like. It covers your beneficiaries for the entire span of your life.
You pay a premium every month. Your policy accrues cash value over time, which you can borrow against. However, many insurers don’t recommend taking money out unless you absolutely need to. Also keep in mind that these policies are much more expensive than term ones.
According to Steve Anzuoni, owner of Fairway Financial, “Whole life, or permanent insurance, can be an good fit for those seeking to obtain coverage that remains with them until they die, whenever that occurs, and who may want to build up cash value that could be used to fund a kids education, or supplemental retirement income.”
You can read more about whole life in our article on The Many Types of Whole Life Insurance.
Term life insurance covers you for a shorter period of time, most commonly 10, 20, or 30 years. It also doesn’t accrue cash value, but is less expensive than a whole life policy.
Anzuoni says, “Term is most suited for those looking to obtain maximum death benefit for a specific number of years. Young families with kids and a mortgage, as well as businesses with short term needs are excellent candidates for term insurance.”
We will spend the bulk of the article discussing this type of policy.
Term Life Insurance
As stated above, term life insurance covers you for a specific term in your life. It will only pay death benefits to your beneficiaries if you die within that term. If you die after the policy is up, no one will receive any compensation.
There are many types of term life policies. We’ll discuss each one, as well as their respective pros and cons.
Renewable Term
This type of coverage allows you to renew your policy after it expires, no matter the state of your health.
It becomes harder to obtain a life insurance policy if you have a pre-existing health condition. But if you have a renewable policy, your insurer is obligated to renew your policy, until you’re at least 75 years old.
However, your premiums won’t necessarily stay flat. They may increase as time passes; it depends on your specific policy. But, the good news is that the amount of coverage will never decrease.
Level Term
This is where the amount of death benefits stays the same for the entire duration of the policy. No matter when you die within the term, your beneficiaries will receive the same amount of monetary compensation. The premiums you pay toward this policy also won’t change during the term.
This is a great policy for someone who wants to make sure their family can pay off their debts if they die.
So if you’re worried about inflation, debt, or other events causing the value of your death benefits to decline or your premiums to become unaffordable, this may be the policy for you.
Increasing Term
Each year you hold your policy, the value of your death benefits will increase as will your premiums. This type of coverage isn’t very popular among insurers, and people rarely purchase it anymore.
Decreasing Term
The opposite of increasing term insurance, with this type of policy, death benefits decrease over time. However, the premiums remain stable, rather than steadily declining.
While it might seem unnecessary to purchase this if you’ll be receiving less than you’re paying for, it does have its advantages. People tend to purchase this policy if they need to pay off a mortgage, or other debts. This is because as your debts or mortgage value decreases, so will your death benefits.
It’s not uncommon for people to purchase the decreasing term policy so it ends at the same time their mortgage does. For example, they might purchase a 30 year mortgage, and a decreasing term policy that also lasts 30 years.
This way, if you were to die during the term, your beneficiaries would have the exact amount left of your death benefits to pay these unwanted expenses off.
Convertible Term
If you think you might want to transfer your term life policy to a whole, variable, or universal life policy down the road, consider purchasing a convertible term policy. If you convert during the conversion period, you can switch policies without any medical underwriting. The conversion period will vary depending on the length of your term policy.
Keep in mind that your premiums may go up, because they will assess your new premiums based on your age. They will also increase because whole life policy premiums are usually much more expensive than term life premiums.
Adjustable Premium
Also known as a variable premium, this allows the insurer to adjust your premiums throughout the term of the policy. This will allow the insurer to make modifications to the policy due to various factors such as health and mortality risk.
Return of Premium
With this policy, your insurer will reimburse your premium payments at the end of the term. That is, of course, if you don’t pass away. The downside is these policies cost much more than a regular term policy, but are still cheaper than a whole life policy. And keep in mind that if you cancel the policy before the term is up, you won’t receive a full refund of premiums.
Modified Term
This is for people who may have trouble paying for a policy otherwise. It allows you to structure the payments how you want. If your insurer allows it, you may be able to either structure it as an increasing term, decreasing term, or other type of payment method.
Amount of Coverage
The amount and type of coverage you choose for your policy will depend on your personal life, as well as your financial stability. Different situations in life lend themselves to different types of term policies.
For example, if you’re single without any dependents, you may not need a policy. But if you don’t want your loved ones to have to be left with your mortgage payments, loans, and burial costs when you die, it’s a good idea to purchase a policy. You might look into a decreasing term policy for this.
For other life events, if you have a spouse and dependents that rely on you for income, consider a level term policy of upwards of 20 to 30 years. And if you’re retiring, you might not need life insurance anymore.
Anzuoni agrees and says, “There are many different ways to determine how much term coverage is needed, but a good rule of thumb is to purchase at least 10 times your income, plus enough to pay off your primary mortgage.”
He also believes, “A more exact way would be to look at income replacement needs, potential college funds needed, mortgage payoffs, and funeral arrangements to arrive at a number. Then you should try to obtain coverage for as long as your budget allows for, but at least until the kids are gone, the mortgage is paid off, or you reach retirement age, whichever comes later.”
You can read more about the amount and type of coverage that is best for each life stage in the following life insurance guides: having a baby, getting married, getting divorced, and after retirement.
FREQUENTLY ASKED QUESTIONS
Q: What happens if I want to cancel my policy in the middle of the term?
A: Significant life changes may cause you to cancel your coverage before the term is up. But before you cancel your policy, make sure that’s the decision you want to make. If you’re already halfway through your policy term, you may just want to stick it out.
And if you can’t afford to pay the premiums anymore, you can always talk to your insurer about switching to an adjustable premium or modified term. Also be aware of the cancellation fees that come with terminating your policy.
Q: What if I have a pre-existing health condition that is preventing me from obtaining a policy?
A: A health condition might cause an insurer to reject you, or charge higher premiums. This is because you are riskier to insure.
Luckily, there is a policy out there for everyone. If you’re getting discouraged and your health is preventing you from buying a policy, you might just need to shop around. The best way to find affordable rates from multiple companies is to use QuoteWizard.
Q: What are some term life insurance riders or endorsements?
A: Let’s say you need a life insurance policy but no insurer will take you due to a pre-existing condition. You can always purchase a Guaranteed Insurability rider, which will cover you without any medical underwriting. However, the catch is that the premiums are much higher, and the death benefits are much lower.
And if you’re terminally ill, look into an Accelerated Death Benefit rider. This allows you to take out up to $250,000 to $500,000 from your death benefits. You can then use the proceeds to pay for things like medical bills.
You might also look into purchasing an Accidental Death Benefit rider. It allows your beneficiaries to receive double the death benefits if your death is ruled an accident. Of course, this is contingent on how you die.
Check with your insurer for more information. There are other riders out there, these are just the most popular.
Q: Which term policy provides the most coverage, and which one provides the least?
A: Steven Schwartz is the vice president of the insurance brokerage, HUB International Northeast. He says a level term life policy will most likely provide the most coverage.
As for the least amount of coverage, he says, “There are term life policies that have decreasing death benefits that I would tend to stay away from. Additionally, some term life policies do not have conversion options for the insured that may be valuable for them in the future.”
Q: Which is better: whole life or term life?
A: According to Michael Briggs of Horizon Investment Management Group, whole life is very expensive and not appropriate for most people. This is because he says it’s falsely sold as an “insurance with an investment,” in the form of cash value.
“Due to the high premium cost and the low rate of return on the cash value, you don’t get the growth you need for retirement nor enough insurance,” Briggs said. “Term life policies are affordable and perfect for what most people need them for, to cover lost income for their family in case of death.”
Make sure you truly weigh to cost benefits and disadvantages of both types of policies, before making a decision.
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