Term Life Insurance?
Millions of individuals around the world want to care for their family’s needs in the event of their untimely death. One of the most common options that people use for such protection is a life insurance policy. While there are several types of life insurance policies available on the market today, by far the most popular one is term life insurance. This article will discuss what term life insurance is, how it works, and why you may want to consider taking advantage of its features.
What is Term Life Insurance?
“A type of life insurance that guarantees payment of a stated death benefit if the covered person dies during a specified term. Once the term expires, the policyholder can either renew it for another term, convert the policy to permanent coverage, or allow the policy to terminate.”
Basically, a term life insurance policy covers an individual for a predefined period of time (or “term”), and provides a payout to surviving family members if the covered individual dies during that time.
How Does Term Life Insurance Work?
There are three basic elements in any term life insurance policy:
- The premium(s)
- The payout amount
- The term of coverage
When you are preparing to purchase a term life insurance policy, your insurance company determines your premiums (or what you have to pay) by examining factors such as your age, gender, health condition, driving record, smoking status, occupation, family history, and so forth. If you are considered to be a “low risk” policyholder, you’ll usually be able to pay less than individuals in high-risk groups.
The payout amount is the amount of money that the insurer promises to give your family in the event that you die during the covered term. It is important to note that most insurance policies will not pay out money under certain conditions. For example, many insurers do not cover suicide within 2 years after the beginning of the policy. However, special circumstances notwithstanding, life insurance companies are obligated to pay out to survivors the amount defined within the policy.
The term is how long you are covered by the policy. There are multiple term options from which to choose, such as 10, 20, or 30-year terms. Since most term life insurance policies expire before paying a death benefit, companies are often able to pass along savings to customers in the form of lowered premiums. This means that you may end up paying a significantly lower premium per month with term life insurance compared to other options, such as whole life insurance
What is the Difference Between Term and Whole Life Insurance?
The basic difference between term and whole life insurance is that term insurance policies only provide coverage for a certain time period, whereas whole life insurance provides permanent, lifelong coverage. That being said, there are other significant differences between term and whole life insurance. These include:
- Cash value. A term life insurance policy has no cash value other than the coverage provided in the event of the policyholder’s death. In contrast, there is an investment component in whole life insurance (referred to as the policy’s “cash value”). This cash value gradually increases in a tax-deferred account, meaning you won’t be liable for taxes on any gains while they are accumulating. Some whole life insurance policies even pay out annual dividends.
- Financial flexibility. In addition to its value as an “investment,” a whole life insurance policy can be surrendered for cash. It can also be used as equity for a loan. Term life insurance policies offer no such options.
- Cost. The biggest advantage of a term life insurance policy is the fact that it’s relatively inexpensive compared to whole life insurance. For instance, a relatively healthy person in their 30’s may only pay around $30/month for a term policy. In contrast, a similar whole insurance policy could cost them well over $200/month!
When Should You Choose Term Life Insurance?
It may not be easy to know which life insurance policy to choose. Some individuals decide to not take out any life insurance at all — a choice that may provide short-term advantages, but can be very risky in the long run. Others select a permanent life insurance plan, such as whole life insurance. They may need insurance that stretches beyond a predefined term. For example, they may want to:
- Leave an inheritance for their children with life insurance
- Fund a trust with the value of their life insurance policy
- Cover funeral expenses for their family, since their savings may not be adequate
- Provide enough money for their beneficiaries to pay estate taxes
On the other hand, term life insurance is a popular option for business owners or individuals that want extra financial protection for projects with a finite time frame. For instance, many homeowners take out a term life insurance policy to cover the years of their mortgage. Others seek protection during their children’s college years. Still others want a policy that will cover them until retirement age.
In addition, term life insurance is a great option for individuals that must operate within a fairly strict budget. It is by far the least expensive option in the life insurance industry, and offers the same guarantees that whole life insurance does: namely, neither the premiums nor the death benefits will change during the time the policy is in effect.
Granted, it can be difficult to make the right choice when it comes to life insurance options. Fortunately, there are insurance experts on hand that can help you to select the type of policy that most closely matches your budget, concerns, and goals. With the aid of experienced industry professionals, you’ll be able to make the right choice for you and your family.
For more information on low-cost term insurance plans, reach out to our friendly team of professionals at Amerus today. Visit us online, or give us a call at 1.888.441.7891. We’d be happy to assist you in your search for the perfect life insurance policy