Life insurance is one of those things people avoid thinking about—you’re too young, it’s too expensive, it’s morbid—until the time comes when we need to be worried.
But in fact, life insurance can be an affordable purchase that many young adults and old alike need to consider.
When you do shop for life insurance, it can be easy to be baffled by the choice and variety which accost you.
- Do you need it forever, or just for now?
- Do you want your premiums to stay the same, or is flexibility more your style?
- Can you really afford it?
The most affordable, useful coverage that alleviates the concerns listed above is term life. Read on to see how you could benefit from a term life insurance policy.
What Is Term Life Insurance?
In short, term life insurance is a policy which guarantees a payout of a stated death benefit during a specific, predetermined term.
Upon expiration of this term, the policyholder has three choices:
- cancel the policy and go without life insurance
- renew the term, or
- switch to permanent coverage.
The only value in the policy is the death benefit, which is guaranteed. Unlike whole life insurance, there are no built-in savings accounts or additional components; the sole focus is to insure an individual against loss of life, and paying out a cash benefit if this incident occurs.
The benefit can be spent in any way the policyholder chooses, from settling the debts of the deceased to covering the cost of a funeral or long-term healthcare.
Term life insurance policies are popular primarily due to their simplicity, and are often touted by all financial experts like Susie Orman and Dave Ramsey. All costs of underwriting are included in the premiums, so there are no unexpected costs or hidden charges along the way.
The premiums also tend to be lower due to this simplicity, making this an attractive option for earners of all income brackets and social groups.
The Types Of Term Policies
As we have stated, term policies are characterized by their simplicity, and there are three options, each with their benefits and disadvantages.
- Level premium, or level term policies: These options will provide coverage for a fixed period of between 10 and 30 years. The death benefit and the premium paid are both fixed, making this more accessible for those on a tight budget. Bear in mind that premiums tend to be higher, to allow actuaries to account for the rising costs of insurance over the life of the policy.
- Yearly Renewable Term (YTR) Policies: These are policies which are renewable every year and require evidence of your insurability in the form of medical exams or other tests. Premiums on these policies tend to be relatively low at the start of the policy, but tend to rise as the policyholder ages. This tendency can make them very expensive over a long period, and they are less popular as a result.
- Decreasing term policies: The death benefit of these policies declines each year, and this is set out at the beginning of the term. The premiums are fixed and level throughout the policy. This type of policy is popular for mortgages or other projects with depreciating values.
Pros of Term Policies
As we have discussed, term policies have several advantages, including:
One of the big appeals of term insurance policies is the lower premiums. Within the term, if the policyholder should die, the company will pay out the face value of the policy.
If the policy lapses before the insured party dies; however, there is no payout, and the insurance company has made a serious profit.
The policyholder can renew their policy once it has lapsed, but at this point, new premiums will be calculated based on factors such as the updated age, health, and lifestyle of the insured.
The policy is only valid for a short period, and only a death benefit is paid out; there are no savings or additional benefits. This works because such policies are beneficial to the insurer.
The majority of policies will expire before the policyholder has a chance to make a claim, meaning that there is a lower overall risk for the insurer, and they can pass this cost onto the customer with lower, more attractive premiums.
This point makes term life insurance particularly appealing for younger customers who may struggle to pay premiums.
If you have needs which will disappear with time, or if you need a policy which lasts around ten years or less, then a term insurance policy is the ideal choice.
For example, many people will opt for a term policy if they only need life insurance for a definite period; perhaps the primary breadwinner becomes injured or unwell and is unable to work.
If the main income provider were to die, the family would be in a precarious financial situation, so taking out short-term insurance is sensible, and more accessible than a long-term plan.
There is always an option for the policyholder to convert their policy to permanent or whole life coverage at any time, should they find they require extra coverage and protection.
This switch can be made while the term policy is in force with no downsides, and no need to show or prove that they are insurable.
The ability to add riders to your policy is one of the critical benefits of choosing a term package.
Different variations of terms can be combined with the rider you need to suit your needs, like having a children’s rider, and this allows the creation of a personalized and tailored package that lets you pay only for what you need.
Any benefits which are received as a result of death are not subject to state inheritance taxes or federal income, meaning there is one less thing for your family to worry about.
As with anything good, there are some disadvantages to term life insurance which are essential to consider.
The flexibility of term insurance can be one of the drawbacks. The future is impossible to predict, and you may shun the idea of whole life coverage only to discover that you have paid far more in term policies after 20 or 30 years.
Your premiums could fluctuate during this time, and there are no guarantees to retain affordability. It is impossible to say when you are taking out a policy how long you will need it, so sometimes it is easier to take out whole life coverage from the outset.
With each year that passes, the policyholder will continue to age, and the likelihood of developing additional health problems becomes increasingly likely.
As this happens, the insurance company has the ideal excuse to put up the premiums on an annual basis, until they are spiraling out of control.
What may not seem to be an issue when you take the policy out as a young, fit twenty-something could increasingly become an issue as you carry on through your life.
Rising mortality charges play a big part in this. In these cases, premium costs are averaged until the age of around 95 or 100 years old, and the earlier payments more expensive to help reduce the cost of premiums later in life.
No Chance to Build Up Capital
A whole life policy offers not only the premiums which have been paid in during the life of the policy but any cash value which has accumulated during the term.
This benefit can make it feel as though you are earning something from your premiums.
While that return does seem appealing, there are plenty of investment options which cost less money and keep your insurance and investing separate.
Another downside of term life insurance policies is that you often end up paying extra in tax. For every dollar you spend on a life insurance policy, the IRS will tax you.
A permanent life policy, on the other hand, will allow you to pay any morality charges directly from their asset portfolio or savings components, both of which are tax-free.
Other Types of Life Insurance
The first thing to understand is that there is no single best life insurance policy. People are complex creatures, and there is no use in having one-size fits all policy. A range of different policy types means that you are sure to find something to meet your needs best.
The different options include:
- Accidental Death Policy: An accidental death policy will pay out to your beneficiaries in the event of you suffering an accidental death. It is important to remember that no payout will occur if the policy elapses during your lifetime and that these types of policies do not cover death from illness.
- Whole Life Insurance Policy: The permanent nature of whole life policies means that they will last for your entire lifetime, rather than a predetermined period. They also offer cash value bonuses, an amount you can borrow against.
- Universal Life Insurance: This option is similar to a whole life insurance policy in that it covers you for a lifetime, but a universal life policy tends to be more fluid and flexible. You will have options such as using your cash value to cover insurance costs and being more flexible with premiums.
- Term Life Insurance: This is the most popular type of policy, mainly because it is far cheaper to purchase. Unlike whole life policies, term coverage is only for a predetermined number of years, such as 10, 15 or 20. Should you pass away while the policy is active, your beneficiaries will receive a payout.
If you survive the term, however, no payout will be made. Premiums are usually lower, and fixed at a monthly amount, making this easy to afford.
Should You Choose a Term Life Insurance Policy?
A term life insurance policy is most attractive to young couples who have children, as it allows the parents to obtain a higher level of coverage for lower premiums and costs.
Since many people buy these policies online, you do need to make sure you are buying from a reputable provider or website, to make sure you avoid possible scams.
If a parent dies, the increased benefit can significantly replace the income which has been lost.
But it’s also the most affordable option as you continue through different stages of life, with many long term options available.
In addition, if you require coverage only for a set amount of time, like the length of time until you retire, term life could be the ideal solution.
If you decide that by the time the policy has expired, your beneficiaries will no longer benefit from financial protection, you may choose a term life policy to benefit from the lower premiums with the bonus of a high payout.
Term life is the most affordable, flexible, and convenient life insurance policy you can find. Contact us and get quick term life insurance quotes today.