Types of term life insurance
Term life insurance comes in a few different forms. Here are the most common types of term life insurance policies:
- Level Term Insurance: This is the most straightforward type of term insurance. You choose a term length, usually between 10 to 30 years, and a coverage amount. If you die within this term, the death benefit is paid out to your beneficiaries. The premiums generally remain the same (or "level") throughout the term.
- Decreasing Term Insurance: In this type of term insurance, the death benefit decreases over time, often annually, while the premiums usually remain level. This is commonly used for mortgage protection, where the death benefit decreases along with the outstanding mortgage balance.
- Increasing Term Insurance: Unlike the decreasing term policy, the death benefit in an increasing term policy increases over time. This can be beneficial for those who anticipate their financial responsibilities will grow over time. The premiums also generally increase over time.
- Annual Renewable Term Insurance (ART): This policy is renewed annually, usually without the policyholder needing to pass a medical exam each year. However, the premiums increase every year with the policyholder's age. The death benefit remains the same throughout.
- Return of Premium Term Insurance: In this type of policy, if the insured person outlives the term, a portion of the premiums paid throughout the term can be returned. This type of policy typically costs more than a standard level term policy.
- Convertible Term Insurance: This policy allows the policyholder to convert the term policy into a permanent policy without having to undergo a medical exam. The premiums for the new permanent policy are usually higher.
Note: Term life insurance may also have riders such as an Accelerated Death Benefit Rider. This rider provides the insured access to the death benefit while they are living if they have a terminal illness. Refer to any riders issued with your policy for details.
Understanding these variations can help you make an informed choice about the term insurance that's best for you.
How much term life insurance do you need?
If you’re fairly sure that term life insurance is best for you, the next big question is how much life insurance do you need? It ultimately depends on your unique circ*mstances and financial goals, but here are some factors to consider when determining how much coverage to get:
- One common rule of thumb is to have life insurance coverage that's 10 to 15 times your annual income. So if you earn $100,000 per year, you’ll want to aim for a policy that provides $1 million or more. This could help to provide a financial cushion for your dependents by replacing some or all of your income if you were no longer around.
- Next, add up the total amount of your outstanding debts. This could include mortgage, car loans, credit card debt, and any other personal loans. If you pass away, you likely want to be sure that your insurance can help your family cover these obligations.
- Factor in future education expenses. The cost of college education can be quite substantial, and a life insurance policy can help to ensure that your children will be able to pursue their educational goals in your absence.
- If you know there will be future financial responsibilities such as care for aging parents or a special needs child, you’ll want to account for those as well.
- Lastly, don’t forget to include funeral expenses and estate settlement costs.
On the flipside, don’t forget to account for your existing savings, investments, and any other life insurance policies as those assets can reduce the amount of additional life insurance you need.
Is term life better than whole life insurance?
While term life insurance covers a specific period, whole life insurance provides lifelong coverage and also includes a cash value component that grows over time. In other words, if needed, you can tap into that cash value while you’re still living.
Because of that, whole life usually has more costly premiums and you’ll have to pay them throughout your life. These policies also tend to be more complex.
The bottom line is that one type is not necessarily better than the other – it really depends on your end goal, your budget and your coverage needs.
Who Should Choose Term Life Insurance?
Term life insurance is often a good fit for individuals who:
- Need life insurance only for the duration of certain financial obligations (like a mortgage or child’s education).
- Prefer a more affordable form of life insurance.
- Want a straightforward insurance product without any cash value components.
Understanding your unique financial and familial situation is crucial in deciding whether term life insurance is the right choice for you. Always remember to review different options, costs, and insurance providers before making a decision.
Frequently Asked Questions
What happens at the end of the term in term life insurance?
At the end of the term, coverage ends and there's no death benefit payout unless the insured dies while the coverage is active. Some policies offer the option to renew or convert to a permanent life policy.
Can I cash out my term life insurance?
Term life insurance does not have a cash value component, so it cannot be cashed out. This is a feature of permanent life insurance policies that have accrued cash value.
Are term life insurance premiums fixed?
Most term life insurance policies have fixed, or level, premiums that remain the same throughout the term of the policy. However, some policies known as "increasing term" have premiums that can increase over time.
Is the payout from term life insurance taxed?
Generally, the death benefit received by the beneficiaries of a term life insurance policy is not subject to income tax.
Can I convert my term life insurance to permanent life insurance?
Some term life insurance policies allow you to convert to a permanent policy. This usually has to happen within a specific period or by a certain age. Check your policy or talk to your insurer for specifics.
ChatGPT was used for idea generation, but the author made significant modifications and takes ultimate responsibility for the content.
