Term Life Insurance
Term life insurance, also known as pure life insurance, is a type of death benefit that pays the heirs of the policyholder throughout a specified period of time.
Once the term expires, the policyholder can either renew it for another term, convert the policy to permanent coverage, or allow the term life insurance policy to lapse.
KEY TAKEAWAYS
- Term life insurance guarantees payment of a stated death benefit to the insured's beneficiaries if the insured person dies during a specified term.
- These policies have no value other than the guaranteed death benefit and feature no savings component as is found in a whole life insurance product.1
- Term life premiums are based on a person’s age, health, and life expectancy.
- Depending on the insurance company, it may be possible to turn term life into whole life insurance.
- You can purchase term life policies that last 10, 15, or 20 years.
How Term Life Insurance Works
When you buy a term life insurance policy, the insurance company determines the premium based on the policy's value (the payout amount) and your age, gender, and health.
In some cases, a medical exam may be required. The insurance company may also inquire about your driving record, current medications, smoking status, occupation, hobbies, and family history.
If you die during the policy term, the insurer will pay the policy's face value to your beneficiaries. This cash benefit—which is, in most cases, not taxable—may be used by beneficiaries to settle your healthcare and funeral costs, consumer debt, or mortgage debt, among other things.2
If the policy expires before your death, there is no payout. You may be able to renew a term policy at its expiration, but the premiums will be recalculated based on your age at the time of renewal.
Term Life Insurance vs. Whole Life Insurance
Term life policies have no value other than the guaranteed death benefit. There is no savings component as is found in a whole life insurance product.
Term life is usually the least costly life insurance available because it offers a benefit for a restricted time and provides only a death benefit. For example, a healthy non-smoking man aged 35 could get a whole life insurance policy with a benefit of $500,000 for an average of $28 per month as of 2021. At age 50, the premium would rise to $71 a month.3
Depending on the issuer, purchasing a whole life equivalent would have significantly higher premiums, possibly $200 to $300 per month, or more.
Most term life insurance policies expire without paying a death benefit. That lowers the overall risk to the insurer compared to a permanent life policy. The reduced risk allows insurers to charge lower premiums.
Interest rates, the financials of the insurance company, and state regulations can also affect premiums. In general, companies often offer better rates at the "breakpoint" coverage levels of $100,000, $250,000, $500,000, and $1,000,000.
Thirty-year-old George wants to protect his family in the unlikely event of his early death. He buys a 10-year, $500,000 term life insurance policy with a premium of $50 per month.
If George dies within the 10-year term, the policy will pay George’s beneficiary $500,000. If he dies after he turns 40, when the policy has expired, his beneficiary will receive no benefit. If he renews the policy, the premiums will be higher than his initial policy because they will be based on his current age of 40 rather than 30.
If George is diagnosed with a terminal illness during the first policy term, he probably will not be eligible to renew the policy when it expires. Some policies offer guaranteed re-insurability (without proof of insurability), but such features, when available, come with a higher cost.
Benefits of Term Life Insurance
Term life insurance is attractive to young people and children. The parents can obtain substantial coverage for a low cost. If the payout is needed, the family can rely on it to replace lost income.
These policies are also well-suited for people with growing families. They can anticipate that coverage will be needed until, say, their children have reached adulthood and are self-sufficient.
The term life benefit, obviously, may be equally useful to an older surviving spouse. However, other options for providing for a surviving spouse may be preferable given the higher costs of the premiums to older policyholders.
Do I Need Term Life Insurance or Permanent Life Insurance?
The main differences between a term life insurance policy and a permanent insurance policy, such as universal life insurance, are the duration of the policy, the accumulation of a cash value, and the cost. The right choice for you will depend on your needs. Here are some things to consider.
Cost of Premiums
Term life policies are ideal for people who want substantial coverage at a low cost.
People who own whole life insurance pay more in premiums for less coverage but have the security of knowing they are protected for life.
People who buy term life are paying premiums for an extended period, and getting nothing in return unless they have the misfortune to die before the term expires. And, term life insurance premiums increase with age.
This means that term life premiums may cost more over the years than permanent life insurance premiums would have been.
Investment Value
Some customers prefer permanent life insurance because the policies can have an investment or savings vehicle. A portion of each premium payment is allocated to the cash value, with a growth guarantee. Some plans pay dividends, which can be paid out or kept on deposit within the policy.
Over time, the cash value growth may be sufficient to pay the premiums on the policy. There are also several unique tax benefits, such as tax-deferred cash value growth and tax-free access to the cash portion.
Which Is Better: Term Life Insurance or Whole Life Insurance?
It depends on your family's needs. Term life insurance is a relatively inexpensive way to provide a lump sum to your dependents if something happens to you. If you are young and healthy, and you support a family, it can be a good option.
Whole life insurance comes with substantially higher monthly premiums. It is meant to be renewed for as long as you live, and as the coverage matures the policy grows in value and the policyholder can make withdrawals for any purpose. So it can serve as an investment product as well as an insurance policy.
Do You Get Your Money Back at the End of a Term Life Insurance Policy?
If you're alive when the term expires, you get nothing back from your term life insurance policy. It is a death benefit, payable to your heirs only if you die.
That is the reason why term life insurance is relatively inexpensive. Most people outlive their term life insurance policies.
Can a Senior Citizen Get Term Life Insurance?
The insurance companies have a maximum age limit for term life insurance policies. This is usually 80 to 90 years old.
The premium also rises with age, so a person aged 60 or 70 will pay substantially more than someone decades younger.
