What You Should Know About Term Life Insurance
Term life insurance, also called term insurance, is a type of insurance policy that offers the insured a fixed rate that is paid in over a period of time, known as a “term.” The insured has the freedom to negotiate a term, depending on how many months or years they may want the policy; however, after that term expires, the insured must then forego their existing insurance, which means they lose the policy, or they must restructure their package, which could mean paying different rates, including possible higher rates with adjustable interest rates.
In terms of term life insurance vs. whole life insurance, or universal life insurance, the latter policies offer coverage that is kept from the point the insured signs the policy, and kept until death, as long as the payments are made. With a term life policy, however, the coverage is only good for the initial agreed-upon term.
6 Things Everyone Should Know About Term Life Insurance
1: When to Seek a Term Life Policy
Term life insurance benefits are mainly monetary, with no cash value prior to death. For instance, when speaking about term life insurance vs. whole life insurance, the whole life policy will accumulate equity, after a certain number of payments, and the insured can actually cash the policy in for a percentage of the value that would have otherwise been paid out upon death to a beneficiary. With term life, it does not accumulate equity and therefore only pays out as a death benefit. So for individuals who strictly want death benefits paid for funeral and living expenses, or to pass down their estates, a term life policy is suitable and may actually be more beneficial, as the rates are generally better and also fixed.
Many also seek term life if they want to give their children insurance against their deaths. For instance, a parent whose child just started school and relies upon the parent for funding during this time might decide that a term life policy is an ideal insurance policy should the parent die. This way, the child still has the funding to get on with their lives. This logic can be extrapolated to myriad situations which would be ideal for a term life policy.
2: Length of a Term Life Insurance Policy
The term life insurance benefits only pay out on death and are not typically drawn upon as a source of equity, due to the shorter lengths of these policies. Many reputable firms will give these policies out in lengths of 5 and 10 years, with the policy needing to be renewed or just dropped after that initial term. However, the most common term life policy variety is actually a minimum of 10 years, with a maximum of 30 years. So, in essence, adults can have these policies for most of their lives, which help to ensure a larger payout structure of death benefits, yet still will not be able to be cashed in early if the insured is in need of money.
As long as the premiums are paid when due, however, the policy will continue until the end of its term. Reputable insurers offer this as a term life insurance guarantee, so the insured’s loved ones will be cared for upon their death.
3: The Benefits of a Term Life Policy
Every sort of insurance has its positives and negatives. Anyone who has ever had to go into their own pocket for funeral expenses knows how beneficial a small monthly payment would have been for a policy to cover such expenses. So that’s the first benefit of a term life policy, to be sure; the fact that it will cover those initial expenses, which are very costly, given the fact that the death industry is so gargantuan in our society today.
Another benefit is that with a term life policy, the amount paid in does not need to accumulate for a benefit to be paid out. For instance, say that a healthy person in their thirties puts in for an insurance policy of a couple hundred thousand dollars, that will cover their funeral expenses, plus help their loved ones with bills. On a 20-year term, the insured could be looking at payments of less than $50 monthly, and they will not have to keep the policy going for the full term. If they happen to die at any point during the term, the money is paid out.
People who aren’t the picture of ideal health, and who are a little older, can also get this sort of policy easier than a whole life policy, as whole life insurers really expect more paid in, whereas a shorter-term life policy is willing to provide the coverage for the length of the term. Although, the term may end up being shorter, perhaps in 5 to 10-year increments.
4: Disadvantages of a Term Life Policy
As stated, everything has its disadvantages. The best one can hope for is to weigh them out and find something far more beneficial than negative. For a guaranteed insurance policy like term life, one disadvantage is that it has no tax-free feature that leads to automatic savings like a whole life policy has. Though the payments are going to be negligible to most people’s taxes.
The older someone is, or the more marred someone’s medical history is, the more they will have to pay, especially for policies offering shorter terms. This is unavoidable, however, as insurance companies are still companies, not charities. By and large, reputable insurers offer fair treatment.
Unlike whole life or universal life insurance policies, term life does not offer any loan value or living benefit options, so it doesn’t carry or accumulate equity. It’s meant strictly to pay a benefit once the insurer receives the death certificate of the insured.
Once the agreed-upon term of the policy is over, the insured is either dropped or must rework their policy for another term, which could lead to increased payments.
5: Finding the Ideal Policy
Not to sound flippant, as if everything is about money, but life insurance really is about money. It’s about the money an insured pays in, vs. the money that they get to take out. A term life insurance guarantee is put into place to ensure that a death benefit is paid out to a beneficiary, though the insured is also looking for a good policy that doesn’t cost a fortune to hold over the course of the term. To that end, the best policies juxtaposed against their insurance cash value are the policies that are the most affordable for the insured.
The reason this is the case is that the insured can find a more affordable rate based on the term of the insurance policy. For instance, if one were after an insurance cash value of around $100,000, the payment would be higher for a 10-year term than for a 30-year term, and by a pretty wide margin. So it stands to reason that the best policies in terms of affordability are policies that have longer terms. If potential insured individuals are seeking out only 5-year terms, then the prices are going to be higher. It’s as simple as that.
6: Common Mistakes People Make
Hopefully, this piece has been informative and easy to read and absorb. As you can likely see, there’s nothing inherently complex about the topic of term life insurance benefits and policy options. However, just because it can be understood in no way means that there aren’t some pitfalls for which to watch here. So, let’s go over some of the most common mistakes people make here. A) Not Enough Insurance Let’s say that a parent was making $60,000 annually, with a set mortgage, house insurance, and other costs. Yet their policy was only for $40,000, hoping to save a lot of monthly payments. When the insured dies, that money, after funeral expenses especially, is not nearly enough to keep the family going for a few months, much less a year. Always get enough insurance to cover your loved ones’ transition. It’s in the name: “Insurance.” B) Waiting Too Long Because of its name, “term life insurance,” some believe that if they wait until they’re 70, they’re being fiscally responsible and only getting insurance when they need it. However, this means the insured must pay a much higher premium, for a much shorter term policy, for not as much payout. Experts estimate that in one’s late twenties to early thirties is the time to get their first policy. Remember, policies can be renewed after the term, and a good insurer will roll over the terms of the policy after restructuring. C) Stocking Up on Riders In the insurance world, riders don’t wear helmets. They’re like policy add-ons that offer things like payment waivers if one suffers financial loss, or covering different types of potential deaths differently, etc. Riders can be good to have, but many make the mistake of getting so many of them that their policy premiums skyrocket and they struggle to afford the insurance. This is great news for agents, but not good for the insured. Take it easy on the riders. If you need to, speak with a professional, or a reputable agency. D) Neglecting the Fine Print Everyone who’s ever ordered those 10 albums for a penny before or got locked into their first mobile contract has made the mistake of not reading the fine print. It’s understandable in certain situations, but not for term life insurance. Always make sure you understand every single in and out of the policy before signing. Make sure you’re getting enough, have a premium with which you’re comfortable, and that you know about the policy before signing.
All that’s left to say here is good luck in finding the life insurance policy that works the best for you. Hopefully, that burning question of “What is term life insurance?” has been answered for you in a way that was easy to understand and enjoyable to read.