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What is Term Life Insurance?
Term Life Insurance provides coverage for a specific number of years at a set premium for the duration of the policy. Typical term life insurance plans are available for 1, 5, 10, 15, 20 or 30 years.
Some term life policies may be renewed at the end of the term (at a higher premium), and some plans may be converted into a permanent life insurance policy.
Term life insurance has several advantages over permanent life insurance plans:
- The premiums are generally lower than those for permanent plans, especially for younger policy holders.
- Term life insurance plans enable younger policy holders to be able to afford more coverage at the stage of their lives when they probably need it most (to cover a mortgage, their children's future college tuitions, or other major expenses).
- Term life insurance is structured such that you can easily increase or decrease the coverage amount as your needs change (when the current term expires).
Of course term life insurance has a few disadvantages as well:
- As you grow older, the risk to the insurance company increases so your premiums at renewal (or for new policies) increase accordingly.
- You may not be able to renew your policy at the end of the term due to health problems.
- When the term expires the new premium might be too expensive to renew. In this case, the cost of a new policy would likely be prohibitive as well.
- Unlike permanent insurance, term life insurance doesn't build up a cash value. Unless you have a claim (and of course you hope you won't!), every cent paid into the policy is lost.
There are three major types of term life insurance:
- Level Term Life Insurance - This type of term life policy has a benefit that stays the same over the entire term. If you have a 10 year $50,000 policy, it will pay $50,000 at any point during the 10 year coverage period.
- Decreasing Term Life Insurance - While the premiums usually remain the same, the coverage amount will decrease each year of the term.
- Increasing Term Life Insurance - Both the premiums and the benefit increase with time in a manner specified in the policy.
Tips for getting the best deal on term life insurance (for both your initial policy and renewals):
- Shop around for the best rates. Term life insurance premiums vary widely from company to company.
- Check to see if your employer offers a group plan and compare it to the plans offered by several independent insurers. Don't automatically assume that you can get the best deal through your employer (although you often can).
- If you live a healthy lifestyle, your life insurance costs will remain relatively low. Good health will also make it easier to renew your term life insurance policy or purchase a new plan when you have to.
Conclusion
Term life insurance provides an inexpensive way to protect your family's future, especially in your younger years. A term life policy will enable you to tailor your coverage to your exact needs and change it later as your needs change.
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