Term life insurance and why it is important for everybody
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Shopping for life insurance can seem overwhelming. You hear terms such as term, whole, and permanent life insurance. The most common type is term life insurance. It’s affordable, covers young families well and is easy to understand.
We break down the term life insurance basics for you below.
What Exactly is Term Life Insurance?
First, let’s define term life insurance. As the name suggests, it’s good for a specific term. For example, if you buy a 10-year term policy, it lasts for a duration of 10 years. If you’re still alive at the end of the ten years (which is a good thing), the policy expires.
You pay monthly premiums for term life insurance. As long as you keep making your payments, your policy stays in effect. If you happen to die during the term of your insurance, your named beneficiaries will receive the payout. For example, if you have a $500,000 term life insurance policy and you die before it expires, your beneficiaries will receive the $500,000 as long as your death doesn’t fall under any of the policy’s exclusions.
How Much Does Term Life Insurance Cost?
The cost of term life insurance depends on a variety of factors including:
- The coverage amount – The more coverage amount you need, the higher your premiums become. For example, a policy for a healthy 25-year old male for $10,000 will cost less than a policy for $500,000
- The term – Insurance companies typically offer terms ranging from 10 years to 30 years. The longer the coverage you want, the more your premium will cost.
- Your health – Life insurance companies will require a basic medical exam as well as discuss your family and personal medical history. They base your cost on your likelihood of filing a claim (dying) using the answers you provided.
- Your age – The younger you are when you commit to term life insurance, the less it costs. The rates increase an average of 8 – 10% each year that you wait.
- Your gender – Women tend to outlive men, which means they often have lower term life insurance premiums too.
- Your occupation and hobbies – If your job or hobbies put your life at risk, you are a higher risk of a claim for the insurance company. Insurance companies may charge higher premiums to make up for this risk.
The Pros and Cons of Term Life Insurance
Term life insurance has many benefits including:
- It eases the financial stress your loved ones experience upon your death. They can use the funds to pay off the mortgage, pay for college, or pay off debt.
- You can lock in low rates when you are young. The rates remain the same for the entire term even though you age.
- Term life insurance is the most affordable form of life insurance available today.
- Term life insurance is easy to understand; there aren’t any complicated terms.
- You can stop paying the premiums if you outlive the term.
- Term life insurance is great for young families that need affordable coverage.
- You can use term life insurance as a bridge until you can afford permanent life insurance.
- Your beneficiaries may not have to pay federal income taxes on the payout.
The Cons of Term Life Insurance
Term life insurance does have some downsides that you should know as well:
- The coverage ends as soon as the term expires.
- You don’t get any cash value out of the policy – once it ends, that’s it.
- Term life insurance doesn’t build any cash value or have earnings.
What Alternatives are There to Term Life Insurance?
If you want something a bit more robust than term life insurance, there are other alternatives including:
- Whole life insurance – This permanent life insurance policy has a death benefit and a cash value. The cash value grows tax-deferred and comes from a portion of the premium you pay each month. You earn a fixed rate of return on the cash portion of the policy. You’ll have to consider surrender fees and taxes when you cash in your whole life policy.
- Universal life insurance – This is another permanent life insurance policy with a cash value. The interest you earn on the cash portion of the policy is variable, though, and is based on the market’s current rates. You can change the death benefit and premium amount throughout the term.
- Variable life insurance – This permanent life insurance policy also has a cash value, but rather than having a savings vehicle, your money is invested. The cash portion of the policy goes into mutual fund accounts where your value may increase or decrease depending on the market.
- Variable universal life insurance – This insurance policy combines the benefits of both the variable life insurance and universal life insurance. In other words, your cash value of the policy gets invested, but you have the ability to change the death benefit or premium throughout the policy’s term. It’s the most complicated form of life insurance and the least common.
Is Term Life Insurance Worth It?
Term life insurance is often worth it for young families that want to protect their loved ones. It’s also great for families that have large expenses early on in their adulthood, such as a mortgage, debt, or saving for college.
As you age, your need for term life insurance may decrease. If you pay off your home, have college savings, and have little debt, there’s less of a need for term life insurance except to cover your financial arrangements or to ensure that your loved ones have some cash to get them through the rest of their years.
Term life insurance has its benefits and is great for many people. Find out if term life insurance is the best choice for you or if you should choose a more complicate policy with cash value and investment components
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Mahugu Nuthu is a content creator known for his compelling and well-researched business analysis. His blog MHGcode.com, provides insights and proven strategies for effective entrepreneurship, side hustle hunting, passive income pursuit, small business ideas, saving and tips on slashing costs.
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