What Is Term Life Insurance?
There are two kinds of life insurance: permanent and term life insurance. Permanent life insurance (whole life insurance, universal life insurance) lasts for your whole life–as long as you pay the premiums.
Term life insurance, on the other hand, is exactly what its name suggests. It provides life insurance coverage only or the length of time covered by your insurance policy. If the policy term ends and it was not used, it will no longer apply.
This type of insurance can be the ideal choice for a parent or parents with young children, who want to secure their futures in the event anything happens to them.
What are the Pros and Cons of Term Life Insurance?
Depending on your situation, term life insurance may seem like either the best or the oddest thing on earth. But like permanent life insurance, it has its own set of pros and cons.
The pros of term life insurance
Term life insurance policies usually get you just the death benefit (the payout to your beneficiaries). It does not always have riders related to health insurance, and it offers no savings or investments features.
While these look like a whole lot of cons, the advantage is that the premiums are generally very low–they can even be as low as 10% of a regular premium. If you need life insurance for the immediate future, for whatever reason, term life insurance was literally invented for you.
The other advantage is that the premiums are on a flat rate for the entire term of your policy. Unlike the rising cost-of-insurance for universal health insurance over the years, you will pay the same premium every month of the term.
This helps you budget for the long-term. It works especially if you are projecting for a specific future benefit, such as your kids’ college funds or the paying off of a large loan.
The cons of term life insurance
As the name suggests, term life insurance is a very specific kind of life insurance developed for specific short-term needs. This brings the premium price down, but it doesn’t maintain that price after the policy lapses.
To simplify it–remember that your premium is based on your age, gender, state of health, occupation and hobbies. If you are young and your lifestyle is low-risk, the lower your premiums are.
But if, between one term policy and another, you decide to take up skydiving and motocross racing, your premium will spike up. If you discovered a health issue, it will also go up. And of course, you can’t avoid aging. Even if you are still a relatively healthy human being, your premium will go up with age every time you renew your term.
How Short or How Long Can Term Life Insurance Be?
Term life insurance can be as short as 1 year or as long as 30 years. (Depending on your age, anything longer wouldn’t make as much sense). You can also project for a seasonal job’s requirements, or for your kids’ college needs.
What Are the Kinds of Term Life Insurance?
Level-term policy. The policy is taken out for a specified number of years (from 5 to 30 years). The premium does not change for the entire length of the policy. This is the most popular one.
Convertible or guaranteed reinsurable policy. You have the option to convert the term policy into a permanent policy at the end of the term (convertible); or you can reinsure yourself for another term without additional checkups (but with an adjustment in the premium payment).
One-year renewal policy. This term policy is a kind of guaranteed reinsurable policy, but on an annual renewal basis. The premium can go up with age, but you don’t need additional checkups.
Decreasing or mortgage policy. This policy is taken out specifically to cover a large mortgage or loan in case anything happens to you. Because loan payments decrease over time, the death benefit value is designed to also decrease over time. The premium does not change from month to month.
What is Term Life Insurance?
Term life insurance is a unique kind of life insurance that might be what you need right now. With its low premiums, clearly defined terms, and potential conversion into permanent life insurance later on, it makes sense to keep term life insurance in your list of options.