Term Life Insurance 101
Parents often wonder how their family will be taken care of if they are no longer around to provide for them. Between mortgage payments, childcare, utilities, and putting food on the table, how can your family survive if you aren’t here? Many parents consider getting life insurance coverage to protect against the unexpected. But with so many different types of policies available, how do you know which is the best for your family? Read on to learn more about the most popular form of life insurance on the market today – term life insurance.
What is Term Life Insurance?
Term life insurance is designed to give your family protection in the event of your death. Under a term life insurance plan, you choose the benefit payout and how long the policy should remain in effect. The most common benefit payouts that parents select range from $100,000 to $250,000. If you die while you are covered under a term life insurance policy, your beneficiaries will receive the full benefit payout. At the end of the term, the policy expires. Term life insurance policies require you to pay a monthly premium. As long as you stay current with your payments, the policy remains in effect until its termination date.
Term life insurance is attractive to families because the premiums are lower than other life insurance products, such as whole life coverage. These policies are typically easy to set up and, in some cases, do not require a medical exam.
One drawback to term life insurance is that no value is accumulated from the premiums that you pay during the term of the policy. When the policy expires, nothing is paid back to the policyholder. In some cases, a policy may be written to allow for the return of a portion of the premium if the insured is still alive when the insurance expires. These are known as “return of premium” plans and often have higher monthly premium payments than a standard level term plan.
Types of Term Life Insurance
There are several types of term life insurance policies available.
- Level term – This is the most common type of term life insurance policy on the market today. Level term life insurance pays out the same benefit regardless of when the death occurs. These plans typically range from 5 years to 30 years. The number of monthly premiums paid under a level term plan will remain the same until the policy ends.
- Decreasing – Under a decreasing term insurance policy, the death benefit paid out decreases over time. This plan assumes that a family’s monthly expenses will decrease over time as children leave the home and mortgages are paid off. Premiums under this policy will also be reduced over time to accommodate the decreased benefit.
- Annual Renewable – These are one-year life insurance plans that are renewed annually for a stated period of time. Since premiums are calculated using one year, they are typically lower than level term plans, which calculate premiums based on the entire length of the policy. At every renewal period, the premiums are adjusted. Annual renewable plans are a good option to obtain short-term life insurance coverage, which may be necessary if you typically rely on employer-funded life insurance and are in between jobs.
- Convertible – Under this plan, the insured has the option to convert their term life insurance policy to a whole life policy. Depending upon the plan, this can be done either while the plan is in effect or at its expiration. The insured may be required to pay a lump sum to convert the policy and then pay higher monthly premiums under a whole life insurance plan.
- Group – Employers may offer term life insurance benefits to their employees. In most cases, the employer bears the cost of the premiums. Group policies often do not offer the same range of benefits to an employee as if they purchased the policy on their own.
How is my Premium Determined?
Insurance companies consider several factors when determining your monthly premiums. These factors include;
- Age – The older you are, the higher your premiums will be
- Gender – Women typically pay less than men
- Location – In some cases, where you live can influence your monthly premium amount
- Medical exam and health history – If your exam or history shows that you have a condition that could influence the length of your life, your premiums may be higher. Conditions such as high blood pressure, diabetes, or chronic illness could raise your premiums.
- Lifestyle – If you smoke, consume a regular amount of alcohol, or engage in risky activities, such as racing cars or motorcycles, your premiums may be higher
Premiums are typically paid on a monthly basis, although some carriers may allow for semi-annual or annual payments.
Who Should Get Term Life Insurance?
Families with dependent children should get term life insurance. These policies will provide funds that your family needs to pay for expenses like mortgage payments, utilities, childcare, and groceries in the event of death. It can also be a means to provide for your children’s future education.
If you are wondering how your family will survive financially without you, consider getting term life insurance. It is a quick and low-cost way to provide financial stability
