Term Life Insurance Explained

Term Life Insurance Explained

by Leslie Freeland, January 12, 2019

What is Term Life Insurance?

This type of life insurance is common and fairly easy to understand. It is life insurance that pays out if you die during a specific period of time (the “term”). Your beneficiary will receive the entire death benefit (the lump sum paid to your beneficiaries upon your death) no matter when during the term you die, and your monthly payments will never go up. Most term life insurance policies are in increments of 10 years, 20 years, or 30 years. But the length of the term is often more flexible than that. Sometimes you can purchase it in increments of 5 years. It’s really up to you.

Benefits

Level Premiums

Term life insurance has level “premiums.” This means the premium payments will not go up over time, no matter how long you have had the policy. So if you are paying $20 per month for your life insurance policy, the payment will be $20 on the very first month you own the policy and will still be $20 per month on the last month you own your policy.

Level Payout

Also, with term insurance, the death benefit is one set amount and doesn’t change. So, for example, if you bought a 20-year term life insurance policy and died within a few months of purchasing it, your beneficiary would get the full death benefit, let’s say $500,000. And say with this same policy, you did not die until you had the policy for 19 years, your beneficiary would still get the full $500,000. No matter how long you have had your policy, as long as you are still within the “term,” your beneficiaries will get paid the full death benefit.

Affordable

Many people choose term insurance over “permanent” life insurance because it often costs less. When you buy permanent life insurance, the premiums you pay not only help to fund the death benefit but can accumulate cash value which requires the insurance company to manage your account and will last your entire life, so it usually costs more than a term policy.
Term life insurance is a great option if you are starting a family (when many people have a tighter budget) because you are covering a time when your family would need protection the most — and are able to buy better coverage at a low cost.

What Happens When the Term Ends?

The need for life insurance rarely ends, so what do you do when the term of your policy is up?

If you own a term life insurance policy, and it is getting ready to expire, you have one thing to be thankful for — you are still alive! However, now you need to decide what to do about your life insurance.

Purchase Another Life Insurance Policy

One option is to simply purchase another life insurance policy: term or permanent. You will, however, need to re-qualify, with another medical examination and answer the same health questions.

On the downside, your premiums will likely rise because health and age are key factors for determining the amount of your life insurance premium. Unsurprisingly, you will pay higher premiums the older you are when you start a new policy.

If you are in good health with a good family health history – and maintain a healthy lifestyle – you may still get a reasonable rate. In the worst case scenario, if you are in bad health, your premiums may end up being so expensive that you are unable to renew your insurance. Even worse, you may be at risk of not re-qualifying.

One way to avoid this issue is to purchase a permanent life insurance policy instead of a term policy to start with.

Convert to a Permanent Life Insurance Policy

Another solution is switching your plan from a term life insurance policy to a permanent life insurance policy. Many term insurance policies offer an option to “convert” when the term ends.

Before the “term” of your term life insurance policy ends, consult a licensed insurance professional. You may have the ability to extend your current policy or even convert it to a permanent life insurance policy.

Whatever you do, don’t stop making payments or just let the term end without taking action. You may have more options than you know – options that are better than starting over with a brand new policy or going without life insurance.

Renew Your Current Term Policy

Renewing your current term life insurance policy may be an option for you. Some term policies give you the option to renew, often called a “renewal option” or “renewal privileged.” Renewing may or may not end up in higher premiums because sometimes you can renew your policy without a new medical exam, avoiding the underwriting process. Not all policies are able to be renewed.

Choosing to make your original term life policy have the renewal option may end up in paying higher premiums overall, and if you do decide to renew, even though you most likely won’t need to take a new medical exam, your monthly premiums might go up.

Having the option to review your term policy is often a good choice if you want a lower payment to start with because of immediate needs, such as a mortgage payment, and you want the option of continuing your insurance in the future and think you may be able to afford a higher premium in the future, when your career is more established.

If you do have the option to renew, you are not obligated to. When your term policy ends, you can just choose a previous suggestion: let it lapse and apply for a new policy (not recommended) or convert to a permanent policy.

Term Vs. Perm

Life insurance involves an agreement between you and an insurance company. You agree to make premium payments to the insurance company, and in the event of your death, the insurance company pays a lump-sum amount to your designated beneficiary. The amount of premium you pay is based on certain criteria such as your age, health, past illnesses or diseases, and lifestyle.

Term life insurance is kind of like renting a home. As long as you are consistently paying the rent, you can live in it and use it, but when your lease is up, you have to move out. Permanent life insurance (perm) is a little more like owning the house because you can build equity.
Ask yourself how long you think you will need the life insurance coverage. If you are looking at the long term, you may be able to renew at the end of your term policy but your health will be reassessed and your age (and other factors) will impact the amount of your premiums and whether you re-qualify.

Why not Both?

In some cases, you might consider having both a term policy and a permanent policy. This is especially helpful if you want to lock in a life insurance policy before you buy a permanent one. Some term polices do not require a medical exam. Permanent policies always require a medical exam.
So if you are concerned you might have trouble getting a permanent life insurance policy due to health concerns, you can get a non-med term policy first, then apply for a permanent policy. When you get your permanent policy, it’s up to you at that time whether you will keep the term policy or not.

More Thoughts to Consider

Getting a Refund of Your Premiums

If you purchased the ROP (Return of Premium) rider when you bought your term policy, you do have the option to receive a refund of the premiums you have paid for the policy. You are not taxed on this money because it’s considered a refund and not income. Something to keep in mind though, adding this rider will most likely make your premium payment higher than if you just bought term insurance without the ROP rider, and you don’t earn interest on the returned money. It’s just a straight return.
Note: Always check with a trusted, licensed insurance agent before making any decision. Some ROP riders require you to have the policy for a certain number of years before you can receive a refund. If you cancel your policy too early (depends on the insurance company), you may get nothing back.

Investing the Difference

Since getting an ROP rider or a permanent life insurance policy costs more then a term policy alone, some financial advisors recommend purchasing a simple term policy and investing the increased amount you would pay for the rider or permanent policy. For example, you could invest the difference in a Roth IRA. There may be advantages and disadvantages to doing this because it often involves some sort of financial risk. Always check with an insurance agent, and, even a trusted financial advisor (which might be the same person!) before you make any decisions regarding investing.

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Asurea offers Life Insurance, Mortgage Protection Life Insurance, Medicare Supplement Insurance, Final Expense Insurance, Disability Insurance, Long-term Care Insurance, Retirement Planning products and more. For additional information, click on the ‘Learn more’ button below. Want to have articles just like this delivered to your inbox? Just enter your email address in the box below and click ‘Subscribe.’

This information is provided for general consumer educational purposes only and is not intended to provide legal, tax or investment advice. Dollar amounts are for illustrative purposes, not actual.

Leslie Freeland

Leslie Freeland

Find her at LinkedIn
Leslie joined Asurea as the Marketing Communications Coordinator in February 2015. Since then, she has been working closely with insurance professionals to educate the public on the importance of life insurance and protect the public from common scams with informational articles.
Leslie Freeland