Term life insurance

Term Life Insurance

Term life insurance is a life insurance plan that provides coverage for a specific term at a fixed rate. In the event the insured person dies before the end of that term, a death benefit will be paid to his beneficiary. When it comes to buying a substantial death benefit, term insurance is typically the least expensive option. A term life policy expires at the end of the term and doesn’t accumulate cash value like permanent life coverage or universal life coverage. Term insurance is considerably cheaper than whole life insurance and universal life insurance, which is why so many people opt for it.

How does Term Life Insurance work?

Term life insurance is the most straightforward, simplest, and most affordable type of life insurance. You pay a premium for a predetermined period – usually 10, 15, 20, or 30 years. Upon your death, your beneficiary receives a death benefit. The beneficiary receives a death benefit only if the insured dies before the term expires. Upon expiration of that period, the policyholder can no longer receive coverage, and therefore must decide whether to forego coverage or purchase further coverage with different terms or conditions.

Statistics: According to Chapter 7 of the ACLI 2020 Fact Book, out of the new individual life insurance policies purchased in 2019, 41  percent or 4.1 million were term life insurance.

Types of Term Insurance

Term insurance is available in four different options. Before you decide to purchase one, you must understand the differences between them. Depending on your needs, you can narrow your search by choosing from the four categories listed below:

1. Level Term Life Insurance

A level term policy covers you for a set period of time, usually between ten and thirty years. “Level Term” simply means your premiums and death benefits will remain the same throughout the term of the policy. A level-term insurance policy offers peace of mind for you and your family because there is no need to adjust your budget during the duration of the policy. According to ACLI Fact Book, level term life insurance is the most preferred form of term life insurance.

2. Decreasing Term Life Insurance

A decreasing term life policy has a payout that decreases over time. Due to its decreasing payout, decreasing term life insurance is generally less expensive than other types of term insurance. In this plan, the premiums remain the same throughout the term, but the death benefit is reduced by a predetermined percentage each year. The policy could be ideal for people looking to ensure their mortgage repayments are covered in case of death.

3. Convertible Term Life Insurance

Convertible term insurance gives you the option of converting the term policy to a new plan with a longer term. With convertible term life insurance, it is possible to convert a term life insurance policy into a permanent life insurance policy later. If a policy’s premiums are paid on time and the policy terms and conditions are met, then no further screening is necessary for conversion.

4. Renewable Term Life Insurance

Term insurance covers you for a specified duration, usually one to thirty years. Considering purchasing a term life insurance policy, but worried about what will happen when the policy expires? A renewable term policy is likely to be the right choice for you in this case. Renewable term life insurance is exactly as its name implies: it gives you the option to renew after the term expires.

What are the Benefits offered by Term Life Insurance?

Term life insurance is an ideal option when it comes to providing your family with immediate financial support upon your death. Here are some of its benefits:

  1. A term life insurance plan assures your beneficiaries a death benefit if you die during the term. The death benefit can be used for debts, dependent care, education costs for children, funeral expenses, and mortgage payments.
  2. The term insurance doesn’t accumulate cash value and only lasts for a set period of time, making it less expensive and more affordable than whole life insurance.
  3. A term policy provides a valuable life insurance policy with fixed premiums throughout the policy’s term. An early purchase of an insurance plan will result in lower premium amounts.
  4. With its renewable or convertible term options, you can renew your policy and even convert it into a permanent policy for greater protection in the future.

Tip: Having an understanding of what is difference between term and whole life insurance, you will be able to make the right choice!

Term life insurance ends when it expires, but what happens next?

Most life insurance policies never expire, but term life insurance policies will expire at the end of the term, typically after 10, 20, or 30 years. If a term insurance policy expires, what happens next? With term life insurance, you don’t lose coverage just because your term life policy ends. Usually, if you still need life insurance after the term is over, you can renew it. Additionally, if you want to convert your term policy to a permanent policy, you will be able to. However, the premiums will be higher in both cases.

When you outlive your term life insurance policy, what happens next?

The term life insurance policy requires you to pay premiums monthly throughout its term to remain in force. The question is, what happens if you outlive the policy? 

When that happens, your policy will become worthless. When you outlive your term insurance, you will no longer be insured and not get any payout. It’s not worth it to pay years of premiums to an insurance company only to receive nothing in return. However, term life insurance provides simple, affordable coverage with a variety of choices. As long as you still need life insurance protection, you are able to extend, convert, or renew the term policy, making it an excellent option. A financial advisor would be the best resource to find out which option is best for you!

The Bottom Line

A loved one’s death impacts every aspect of a family, not only emotionally but also financially. The first step towards protecting your loved ones after you die is to choose the right life insurance policy in advance. Term insurance is primarily a death benefit policy whose primary purpose is to pay the insured’s financial obligations and protect his family’s financial future after his death.

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