With many types of life insurance available, only term life provides you with level premiums for a set period of time, and the lowest price for your coverage. Here’s why you should consider it for your next policy.
Term Life Insurance
Term Life Insurance Definition – Provides protection for a level period of time, with available durations ranging from 1-40 years. During this time, your premium remains fixed and will not increase.
While term is the easiest type of policy to understand, the features and benefits vary widely from one insurance company to the next.
We’ll show you what to look for to ensure that you receive the best term policy that meets your needs and budget.
How Does Term Life Insurance Work?
You choose the level term length that best meets your needs. Term durations available include:
|1 Year Term||15 Year Term||30 Year Term|
|5 Year Term||20 Year Term||35 Year Term|
|10 Year Term||25 Year Term||40 Year Term|
One life insurer, AIG offers additional term lengths of 16 – 30 years in one-year increments.
Once you’ve determined your term life insurance needs, choose the term length that you would like your coverage to last for. In some cases, it may make sense to add multiple term lengths.
What Age Does Term Insurance End?
Most policies continue until age 90-95…but don’t let this fool you.
When the level term ends, the policy becomes an annual renewable term (ART) based on the ART rates in place at that time.
The reality is that even though your policy is still available when your level term period ends, the premium increase companies will charge you is astronomical!
Here’s an Example – Male Age 40 – $1 million – 20-year term – The best rate today is $595 per year for 20 years…in year 21, the guaranteed rate jumps to $24,605.
If you decide after buying your coverage that you need life insurance to last longer than originally expected, it pays to re-shop in the future and buy a policy, or consider the conversion option available (explained below) on your existing term policy.
Term Life Conversion
A term life insurance conversion privilege allows you to exchange your term policy for whole life insurance or other types of permanent insurance without having to go through medical underwriting again!
While a term conversion is hardly ever used, it’s important to have in the event you develop health issues in the future and still need insurance.
The term life insurance conversion privilege as it is called varies widely by the insurance company. Some companies offer conversion for the entire level term period, while other companies limit the conversion period and/or products available.
Term Insurance Riders
Most life insurance companies offer riders that you may add to your coverage when you apply. The types of riders available are detailed in our Life Insurance Riders Guide.
You’ll see that some riders are free (accelerated death benefits), while other riders can be very expensive to purchase.
Term Life Insurance vs. Group Life Insurance
Term life is owned and controlled by you, while group life is controlled by your employer.
When comparing term life insurance quotes vs. group life insurance, it’s important to look at the pros and cons of each type of life insurance.
Group life insurance Pros vs Cons
|Easy Application Process||Rate increases every 5 years generally.|
|No Health Questions for base coverage||Additional coverage requires medical review.|
|Paid for by employer in many cases||Employer may cancel the plan.|
|Coverage amount may increase with salary||If you leave the job you could lose coverage.|
|Some policies may be portable if you leave||Some policies may not be portable if you leave|
|May allow conversion to permanent insurance||Permanent policy pricing not favorable|
Term Insurance Pros vs Cons
|You have 100% control over policy||Underwriting takes 6-8 weeks for many|
|Premium is fixed for the term length chosen||A paramedical exam may be required|
|Conversion options more favorable than group||Health issues may be costly|
|Pricing is more favorable at greater coverages|
With group life insurance, the base amount that employers give to employees is a great deal and should be accepted especially when it is free.
As soon as you look at supplemental employer life insurance, consider an individual life insurance policy first due to all of its advantages over group life.
Term Life vs. Universal Life Insurance
Universal life insurance is permanent life insurance that has the potential to accumulate cash values, supplement retirement using tax-deferred policy loans, and may provide a lifetime guaranteed death benefit.
There are many variations of universal life insurance available including:
- Index Universal Life
- Guaranteed Universal Life
- Cash Value Accumulation Universal Life
- Survivorship Universal Life
The problem with some cash value universal life insurance policies is that there are many non-guaranteed elements to cash value universal life that may not perform over time.
A guaranteed universal life (GUL) on the other hand works similarly to a term life policy. The GUL is contractually guaranteed to provide death benefits with a fixed premium that does not change.
Term Life or Mortgage Life Insurance
When comparing term vs. mortgage life, there are important differences for you to understand.
The premiums for both policies remain level for the duration of the term. The difference has to do with the coverage amount and how it may be paid out.
With mortgage life insurance, the coverage decreases each year as your mortgage decreases. If you die, the death benefit may get paid to the mortgage company.
Compare that to term policies where the death benefit remains level and proceeds are paid to a beneficiary you name.
Term Life Insurance vs. ROP
If you like the idea of getting money back from your term policy, you may want to consider a ROP – Return of Premium policy.
With ROP term, the life insurer refunds all premiums you paid at the end of the term, vs a traditional term policy that simply ends.
ROP may sound like a good deal (and it can be at times) but keep in mind that your ROP will be more expensive than a level term policy.
Term Life Insurance Underwriting
Underwriting for most life insurance policy types is similar, although there are some policies that allow you to skip the life insurance medical exam, also known as a paramedical exam.
Term Life Insurance FAQ
Term insurance is temporary insurance, providing life insurance for a specified duration of time, while whole life insurance builds cash value and has the potential to last a lifetime if it performs as initially illustrated.
No, term life insurance does not have cash value. There are some term life policies that offer a return of your premium if you cancel those types of policies at a later date.
Group term life insurance is coverage offered by your employer. Most employers have a base amount of life insurance offered to all employees, and a supplemental amount of life insurance that employees may purchase subject to the rules.
You may be able to sell your term life insurance policy if you are older (age 65+), the policy has a conversion privilege available, and your health has declined since you bought the policy. It’s called a life settlement.
Term life insurance is not taxable for the vast majority of situations. There are some instances (typically for business insurance cases) where they may be a tax question. Always consult your accountant for tax advice.