What is term life insurance? Term life insurance is policy that provides a death benefit for certain amount of time. If you, the insured, passes away during that set time period, then your beneficiary would receive the death benefit.
With term life insurance policies, you choose the benefit period that best suits your situation at the time. The benefit period can range from 10 years to 30 years. The premium is guaranteed during the benefit period that you have chosen. Premiums associated with term life insurance tend to be a lot cheaper than those of permanent policies.
Term life insurance is used most commonly to help families cover any outstanding financial obligations such as:
- Child’s Education
- House Loan
- Burial Expenses
- Credit Card Debt
- Student Loans
- Car Loans
- Future Lost Income
Types of Term Life Policies
While term is easier to understand, there are quite a few variations that you will need to know about before purchasing.
- Level Term Life– Level term is the most common term policies purchased today. The death benefit is level for the life of the policy, unless you choose to reduce it. The premiums remain level during the benefit period chosen. For example, if you bought a 20-year term, the premium is guaranteed for 20 years. You can expect that premium to rise quite a bit after the 20-year benefit period.
- Decreasing Term Life– This type of term policy you don’t see as often anymore. These polices have a level premium, but the death benefit decreases each year on the policy anniversary date. The types of term policies are generally used for mortgage loans and business loans. The reason you don’t see them as often is the cost of level term has decreased for the last 20 years, making them comparable in price.
- Annual Renewable Term Life– These term life policies have a level death benefit, but the premiums rise each year based only on you age. The benefit period is usually to age 90, but I have never seen someone pay for one that long. These polices tend to start out with low premiums (because your younger), but as you get older they tend to start to increase more and more. They usually become more expensive than the client wants to pay and are canceled.
- Convertible Term Life– Most level term policies come with a convertibility clause or option, but not all. The convertibility option attached to a term policy allows you the option to convert your term policy for a permanent policy without any medical review or questions. Remember your premium will be based on your age at that time and you will be converting to a permanent policy, so the premium will be higher. This is a great clause to have if your health has changed and your term is about to run out.
- No Medical Exam Term Life- This type of term life policy is when you are not required to complete an exam (blood-work, urine sample, etc.). This can convenient to some but be weary, these types of policies can be much more expensive than an ordinary level term life. Always get multiple quotes in order to make an informed decision.
- Group Term Life- This is referring to term life policies that are offered through your employer. While these are appealing, remember if you leave your job for any reason, you usually lose the coverage. These types of term life policies are great if you have pre-existing health problems because usually no exam is required.
- Living Benefit Term Life– This type of policy is somewhat new to market. These policies are level term life insurance with living benefit rider already built into the premium. The living benefits feature allows you access to a percentage of the death benefit if you were to have a major medical condition such as:
- Heart Attack
- Vision, Hearing, or Speech Loss
- End Stage Renal Disease (Kidney Failure)
- Multiple Sclerosis
- Aortic Surgery
- Parkinson’s Disease
- Severe Burns
- Can’t perform 2 of 6 ADL’s (activities of daily living)
Also, if you are terminally ill (life expectancy of 2 years or less) you would also have access to up to 80% of death benefit to help pay with any bills or financial obligations. Any funds received early are subtracted from the face amount if you pass away.
Can I add riders to my term life?
Many of the term policies come with riders that you can add at an additional cost. Most commonly offered our:
- Waiver of Premium– This company waives the premium if you become disabled. You will have to provide documentation from your doctor each year, but the carrier will pay the premium for as long as you are disabled.
- Disability Income– This rider allows you have some disability income if you were to become disabled. The benefit amount ranges from $250-$2,500 a month. Most disability income riders have 90-day elimination period with a 2-year benefit period.
- Living Benefits Rider– If your policy doesn’t have the living benefits rider already incorporated into it, then some companies will allow you to add this rider for an extra fee. See above for what this rider covers.
- Accidental Death Benefit- This rider pays a specified amount (you choose, but most of the time double) plus the original death benefit if you pass away due to an accident.
- Return of Premium Rider– This feature, which not as common anymore, allows for all premium paid into the policy, at the end of the benefit period, to be refunded. You can also use the premium accrued to buy a “paid up policy”.
What are the Pros and Cons of Term Life
- Low Premium
- Living Benefits Feature (on some)
- Temporary Coverage
- Biggest Bang for your buck if a claim is paid
- Will expire at some point
- No Cash Value
- Inflexible (Premium is set and must be paid)
- Premiums could increase depending on what type of policy you purchased
I think term life policies play an intricate role in the make up of our financial portfolios. If you have a family with children term life is essential in protecting their futures in the event of an untimely death. I think it’s important to have enough term insurance during the years it is needed the most, but also have some type or permanent coverage that will be there when you get older. If you have any questions or comments, please let us know.