Hey friend! Have you ever thought about getting life insurance, but got overwhelmed trying to understand all the different options? I’ve been there too. But today, we’re going to break down term life insurance so it all makes sense.
Term life insurance is exactly what it sounds like – coverage for a specific period of time or “term”. Unlike whole or permanent life insurance that covers you for your entire life, term life gives you affordable protection just for the years when you need it most.
Here’s a simple definition:
Term life insurance provides a death benefit payout to your beneficiaries if you pass away during a predetermined term length, usually ranging from 10 to 30 years.
The best part? Term life premiums are typically 80-90% less expensive than permanent policies with the same death benefit. So if you’re looking to protect your family’s financial future for a set timeframe without breaking the bank, term life insurance is likely the way to go.
Now let’s dive into all the juicy details on the many benefits term life has to offer…
Benefits and Features of Term Life Insurance
When chosen wisely, term life insurance can be an extremely valuable asset for securing your loved ones. Here are some of the best things it has going for it:
Provides Temporary Death Benefit Protection
The #1 benefit of term life insurance is providing financial protection for your beneficiaries in case you pass away unexpectedly during the term.
According to a 2021 insurance study, 48% of Americans say they need life insurance because they want to make sure their families maintain their current standard of living if the income earner died.
With term life, the payout your beneficiaries receive could help cover important expenses like:
- Paying off debts like mortgages, student loans, credit cards, etc.
- Covering funeral and burial costs
- Replacing lost income so daily living expenses are covered
- Funding college savings for kids
The payout amount depends on the death benefit you choose when purchasing the policy. Benefits often range from $100,000 to $1 million or more.
Budget-Friendly Premium Rates
Especially when you’re young and healthy, term life insurance gives you the most coverage for your buck. Premiums are significantly lower than permanent life insurance since term policies expire after the set term length.
For example, a healthy 30-year old could pay premiums of:
- $160 annually for $250,000 of 20-year term life insurance
- $600 annually for $250,000 of whole life insurance
That’s nearly 4x more for permanent coverage! Premium costs do rise as you age, but term life still beats out permanent pricing in most cases.
Customizable Policy Terms
One of the best things about term life is getting to choose a policy length that fits your unique needs and budget. Term lengths often range from 10 years up to 30 years.
Common options include:
- 10 year term life insurance
- 20 year term life insurance
- 30 year term life insurance
The longer the term length, the higher your premiums. But longer terms give your beneficiaries more financial security.
You can also add conversion options and renewability to extend coverage beyond the original term if needed. More on that later!
Range of Policy Types
There are a few different types of term life insurance policies out there. Each has its own pros, cons, and ideal scenarios.
Popular options include:
Level Term Life Insurance – This type has premium payments and death benefits that stay exactly the same over the entire term. It’s the easiest to budget for long-term.
Decreasing Term Life Insurance – With this option, the death benefit amount decreases incrementally over the term while premiums remain static. It aligns well with slowly paying off debts.
Increasing Term Life Insurance – Flip side of decreasing term, this type slowly increases the death benefit amount over time while premiums stay level. It helps maintain buying power.
Renewable Term Life Insurance – Gives the option to renew for another term period without getting reevaluated when the initial term expires. Helpful for chronic health issues.
Convertible Term Life Insurance – Lets you convert from term life insurance to permanent life insurance within a certain timeframe, often without a medical exam. Offers flexibility.
Which you choose depends fully on your financial priorities today and down the road. I’ll go over how to pick the best type for you a bit later on.
Factors Impacting Cost of Coverage
While term life insurance is drastically cheaper than permanent insurance, premium costs can still vary quite a bit between providers and individuals.
What makes rates fluctuate from person to person? Here are the top factors that affect how much you pay:
Age and Life Expectancy
Insurance companies look closely at statistical life expectancy when determining premium pricing. The older you are, the higher chance they take on having to pay out a death benefit sooner rather than later.
That’s why rates for term life insurance policies get higher with each age bracket. Locking in coverage in your 20s and 30s scores you the lowest premiums.
- A 20 year, $500,000 policy for a 25 year old may cost $160 annually
- The same policy for a 45 year old could be $500 annually
Medical underwriting looks at your current health issues and family history to estimate ongoing risks. Conditions like diabetes, heart disease, and cancer can bump up premium costs or make you ineligible altogether.
However, some term life insurance companies offer simplified underwriting or no exam options. These streamlined approaches either ask just a few health questions or rely only on prescription history. Far fewer applicants get denied.
Lifestyle Risk Factors
Dangerous hobbies and unhealthy habits also influence rates. Things like smoking, drug use, drinking, and high-risk sports signal greater chances of accidents or illness cutting life short.
Quitting smoking for just 1 year decreases term life premiums by 8% on average. For a $250,000 policy, that adds up to over $900 in savings over a 20 year term!
The higher the death benefit amount you apply for, the more risk the insurer takes on. So naturally, policies with higher coverage sums cost more in premiums.
Aim to get a death benefit between 7-10x your current gross annual income when budgeting for term life insurance. This gives enough of a cushion to replace income and settle debts.
When to Consider Purchasing Term Life Insurance
Timing is everything when it comes to term life insurance. Unlike whole life that lasts forever, term policies expire.
You want to be sure to lock in coverage during the years when others are financially dependent on you.
Common scenarios where term life insurance is extremely useful include:
Starting a Family
Bringing kids into the picture makes term life insurance practically a must. You’ll want financial protection to cover childcare, education, healthcare, housing, and daily expenses if you or your partner passed away unexpectedly.
Taking on Major Debts
Debts don’t disappear when you’re gone – they often get passed on. Term life insurance creates a buffer to pay off mortgages, student loans, and any other outstanding debts so beneficiaries aren’t burdened.
Starting a business, switching careers, or pursuing further education are exciting but uncertain times financially. Term life keeps family supported during the transition if fortunes don’t unfold as planned.
The key is timing term lengths to match “what if” scenarios that could devastate others if left uninsured. We’ll dig into how to choose appropriate terms next.
How to Shop for the Best Term Life Policy
Let’s switch gears and talk logistics – where do you even start looking for term life insurance? With hundreds of options, it can get overwhelming fast.
Here’s your step-by-step guide to cut through the chaos and find the right term life insurance for your situation:
Compare Quotes Across Multiple Insurers
Never take the first option that comes your way. Premium rates can vary drastically between insurance carriers.
Aim to compare at least 5 quotes side-by-side to find the best value. Independent agents give access to quotes from over 25 top companies all in one spot.
Look for Highly-Rated, Reputable Providers
As you compare options, double check companies have strong financial strength according to rating agencies like A.M. Best, Moody’s, and Standard & Poor’s. This indicates they can deliver on promises.
Also, read online reviews to confirm past customers were treated fairly during the claims process.
Understand Exclusions and Limitations Upfront
Don’t get caught unaware! Be sure to ask questions on any exclusions like pre-existing conditions or limitations like contestability clauses. Get specifics in writing.
Also clarify what does (and doesn’t) invalidate your policy. Things like failing to pay premiums or providing false personal information can affect claims.
Consider Added Perks Like Living Benefits
Some term life insurance carriers include extra perks in policies like accelerated death benefits, waiver of premium, and conversion options.
Living benefits let you access part of the death benefit early if diagnosed with terminal illness. Waiver of premium stops payment requirements if disabled.
Align Term Length with Future Unknowns
As I touched on before, choosing the right term length involves looking into your unique crystal ball.
Think ahead to what key life events you anticipate over the next 10-30 years. Will kids be going to college? Do you have a business loan to pay off? When do you plan to retire?
Find a term that covers those question marks just in case things don’t go as planned. You can always convert or renew later on if needed.
Are Term Life Insurance Benefits also Covered by Insurance Companies?
Pros vs Cons of Term Life Insurance
Let’s round things out with a quick rundown of the best (and worst) parts about term life insurance:
- Lower premium costs
- Customizable term lengths
- Coverage during peak need years
- Income tax-free death benefit payout
- No cash value accumulation
- Health changes may increase renewal premiums
- Need to reapply and requalify after term expires
Overall, term life insurance delivers affordable, temporary peace of mind understanding your people are taken care of financially if faced with the unthinkable.
Conclusion – Which Best Describes Term Life Insurance Benefits?
We’ve covered a ton of ground explaining the ins and outs of term life insurance. Let’s revisit our original question one last time:
Which of the following best describes term life insurance benefits?
Without a doubt, term life insurance is best described as temporary, budget-friendly death benefit protection during your high-need years.
It gives you the ability to lock in financial security for your loved ones for a set period of time when they depend on you most. And it does this at a fraction of the cost of permanent life insurance.
While term policies lack the lifelong coverage and cash value components of permanent insurance, they can perfectly supplement gaps during marriages, mortgages, child-raising, college savings, business launches, and all those other adventures life brings.
Really it comes down to aligning helpful solutions with what you and your family truly need, when you need it. And more often than not, term life insurance benefits fit the bill to a T.
Hope this guide brought clarity and confidence around whether term life insurance is a fit for this season of life. Let me know if any other questions pop up along the way – happy to chat more one-on-one anytime. Here’s to a little less worry and a lot more living!