Term Life Insurance – The Complete Definitive Guide
Posted in Life Insurance last updated on June 1, 2020Term life insurance offers coverage for a specific number of years. The time limit allows insurers to offer policies for much less than the price of permanent life insurance. It’s one of the best ways to save money on life insurance.
It is increasingly popular with working parents to cover things like mortgages, working years, or children until they reach financial independence.
Table of contents:
- Term definition
- Calculating how much
- Term vs. whole life
- Pros and cons
- Types of term life
- No exam policies
- Renewal and conversion
- Term life for seniors
- Term life for children
- Life insurance with tobacco
- Riders
- Guaranteed acceptance
- How Abrams can help
Quick Summary
Term life insurance offers a face amount for
The types of terms allow some customization of the policy. But the simplicity makes it the least expensive type of life insurance available.
Compare term life quotes right now using the Instant Quotes tool on this page.
Term Life Insurance Definition
Term life insurance offers coverage for a term. That’s it. Once the term expires, there is no more coverage.
It’s intended to cover temporary needs, such as:
- Children until adulthood/financial independence
- Years until retirement
- Mortgage
- Provide for a spouse until social security age
When you purchase a term policy, you will set the number of years it covers. For example, if someone chooses a 30-year term with a $500,000 face amount, the policy will give their beneficiary $500,000 if they pass away within that 30-year window.
At the end of the term, you can let the policy lapse, renew, or convert to a permanent policy. Not all companies offer the latter two options.
Figure Out What You Need With A Life Insurance Calculator
Using a ballpark figure of several times your income – like the advice you see in ads – is not useful.
You might see one person recommend 3 to 5 times your annual income. Another person will swear you need at least 15x your yearly salary.
None of the numbers above relate to the expenses you’re using life insurance to cover. They’re just leftover relics from how door-to-door salesmen used to handle life insurance.
Instead, examine the reasons why you’re considering life insurance. These are the numbers you need to pay attention to for the question of “how much?”
Once you ID your reason, you can use a life insurance needs calculator to see how much is just right.
That way, you never waste money buying too much, nor leave your family in trouble with too little.
Term Life Insurance vs. Whole Life Insurance
Whole life insurance was the most popular type of life insurance up until the 80’s. It was a simple product covering you for life.
Now it has additional living benefits, namely the cash value accumulation.
As you pay your premiums, the cash value of the policy grows. With whole life policies, it grows slowly. Other types of permanent life insurance grow faster.
You can borrow against this cash value accumulation for any reason. The insurer uses your face amount as collateral.
Whole life (and other types of permanent life insurance) work best for people with higher net worth. It’s much more expensive and can provide for estate transfer expenses.
More on term versus permanent life insurance.
Pros and Cons of Term Life Insurance
Term is the right choice for most families. It’s much cheaper than permanent – around 1/10th of the cost. It lasts long enough to cover most of the reasons people buy like:
- young kids
- mortgage
- provide for a spouse until social security kicks in
It’s also the most popular type of life insurance right now.
However, term might not be right for you if you need to cover the costs of transferring your estate to your heirs.
It also guarantees something to leave to your loved ones that can’t be eaten up by creditors (varies by state).
The best way to determine what type of life insurance you need is ask yourself why you’re looking into life insurance. If it’s a temporary reason, term is the best choice. If not, look into permanent.
Once you have your reason, you can narrow down the types of term or permanent even further.
Life insurance doesn’t need to break the bank.
Types of Term Life Insurance
Perhaps you’ve heard of mortgage life insurance, increasing term, or level term.
These are types of term insurance allowing you to customize a policy to fit your needs best.
The most common example is covering a mortgage on your home. The amount you owe decreases over time. A decreasing term policy will also lower the face amount and premiums over time.
With increasing term, both the face amount and premiums increase over time. This works best for new families whose expenses and income will grow over time.
The most common type of level term. Everything stays the same.
No Exam Life Term Life
Most insurers offer no-exam term policies alongside their fully underwritten ones.
While you still have the full application with all the medical questions, you can skip the paramed exam.
This option offers more convenient, faster underwriting. Whether you’re too busy or terrified of needles, this option gets the whole process done faster.
The drawback is no-exam policies may cost more than their fully underwritten counterparts. You’ll have to do the math on whether it’s worth the extra cost every month to skip the exam. Or ask your agent to compare for you.
More on no-exam life insurance.
Renewal & Conversion Options
At the end of your term – if your policy has these options – you can renew your term for another length of time or convert it into a permanent policy.
How these options work varies widely by insurer. It also isn’t always offered on term policies.
If you have a term policy now, you may not have a conversion option. Either look at your current contract or call your agent to check.
If you do have a conversion/renewal option, you need to take advantage of it before the conversion period ends.
Conversion/renewal options have one significant advantage over “just buying another policy,” you skip the underwriting.
Let’s say Frank bought a 20-year term policy. It’s expiring in 6 months. Over the last 20 years, perhaps he gained some weight, suffered a mild heart attack, and still battles high blood pressure.
By converting his policy, he gets to keep the same health class at which he was first approved. He will pay higher rates based on his current age. But he won’t be knocked down a health class or two based because he isn’t as healthy as he was 20 years ago.
Term Life Insurance for Seniors
Most seniors don’t need life insurance. The kids are grown. The mortgage is paid off. You and your spouse are retired, or close. No continuing financial obligations mean there isn’t a point.
However, if you do have continuing obligations or want to leave something for your family, life insurance is a vehicle for that.
Term life insurance only issues to seniors in their 60s. In rare cases, you may be able to find a term policy in your 70’s. However, most things you see will be a final expense whole life policy.
Common reason why seniors ask us for life insurance:
- Debt a spouse would be responsible for
- Can’t retire
- Cover funeral costs
- Leave money to family or a charity
In many cases, a term policy is not the right fit. Permanent or final expense makes more sense.
Talk to your agent about what type of policy makes the most sense for your unique situation.
If you’re looking at buying life insurance for your parents, click here for the guide.
Term Life for Children
Most options you see advertised for children are permanent policies. The idea is that the insurance continues to cover the child throughout their adult life too.
It guarantees coverage no matter what health problems they may encounter growing up. They won’t have to worry about being uninsurable later on when they start their own families.
A few companies offer stand-alone policies for children. The standalone policies are always whole life policies.
Most companies have the option to add a term child rider to a parent’s policy. The child rider covers all children in the family, whether you have one or a dozen.
It’s wise to compare the two, but the rider on an existing policy costs less.
More here on life insurance for children.
Term Life Insurance for Smokers
Smoking skyrockets your life insurance rates. It’s often 2 or 3 times as much as the same health class with a non-tobacco rating.
However, there are ways to mitigate it. If you can be as healthy as possible in all other areas of your life, that will at least get you a better health class. A premium tobacco health class is still better than a standard tobacco or substandard tobacco health class.
That includes doing well on your medical exam. Spend a few weeks preparing for it so your agent can argue a higher health class for you if you’re on the fence.
More here for smokers and here for e-cigarettes.
Term Riders
Riders customize your policy. You can add features like monthly income in case of a disability or early withdrawal of funds in the event of a cancer diagnosis.
All riders will cost extra. Depending on the rider, it may be a couple dollars a month to a massive percentage of the overall cost.
For example, the return of premium rider will refund you all of your premiums at the end of the term. However, this can double what you’re paying each month.
Some of the most common life insurance riders are:
- Accelerated Death Benefit – allows you to withdraw funds early when diagnosed with a terminal illness
- Accidental Death – doubles the benefits in the event of passing due to an accident
- Conversion Option – allows you to convert your term policy to a permanent one without underwriting near the end of the term
- Long Term Care – pays for nursing home care
- Child Term – covers a child until maturity then offers a permanent conversion option
- Waiver of premium – waives premiums upon diagnosis of a disability that prevents the ability to work
- Guaranteed Insurability – allows you to increase the death benefit of your policy later on without underwriting
Living Benefits of Term Insurance
Term isn’t designed to offer living benefits.
Insurance companies design it to cost as little as possible.
That means no frills, bells, or whistles. It has one job.
Some riders allow you to make use of your term policy during your life by pulling out some of the face amount (death benefit) early.
You’ll see these riders under the names like:
- Accelerated death benefits
- Critical illness
- Terminal Illness
Each company has a different list of the qualifying illness for taking advantage of living benefits. Make to discuss the differences between policies with your adviser.
Getting Your Money Back On Term Life Insurance
Return of premium allows you to get all of your money back at the end of the term.
This can easily triple the overall cost of the policy.
You’ll get it all back in the end, so what’s the problem?
If you have the cash to afford the premiums, there’s a good chance you also have the financial discipline to invest the money going toward the rider instead. That way you’ll have more money in the long run.
Return of premium is a good option for people who can’t stand the idea that they may not get anything back from the insurance company if they outlive their term. However, it’s our opinion the money spent on that rider is better invested elsewhere.
Full analysis on return of premium here.
Guaranteed Acceptance Term Insurance
Also known as guaranteed issue, guaranteed acceptance means that everyone gets approved. Health issues don’t matter. Underwriters ask few, if any, health questions.
You often see these policies advertised on daytime television. They sound great. Some guaranteed issue policies come bundled with discounts on prescriptions and other membership perks.
The catch is that it’s significantly more expensive. Every other option you can find is cheaper. However, you can still get coverage, even if you’ve been declined for life insurance before.
They also have drastically lower benefit limits.
Guaranteed acceptance is only for people who cannot otherwise qualify for traditional life insurance.
More on guaranteed issue term life insurance here.
Conclusion
Term life insurance is best for temporary needs. The coverage stays in place for a limited time and is much more affordable as a result.
How Abrams Insurance Solutions Can Help
We’re a small group of agents who focus on helping families protect their financial stability. We focus on each family’s unique situation because that lets us create a safety net tailored to each set of needs.
Give us a call at (888) 905-0333. We’re happy to answer any questions.
You can also compare term quotes right now by using the Instant Quotes tool on this page.
