What is term life insurance?
Term life insurance is designed to last for a specific amount of time, usually between five and 30 years.[1] Once the term expires, you no longer have coverage. Many young families choose term life insurance plans because the premiums often cost less while providing financial protection if the main earner dies.
Depending on the situation, the family’s finances might have improved — and young children might have grown up — by the end of the term. As a result, a life insurance policy might no longer be necessary when the term expires.
Learn More: Do You Need Term Life Insurance?
How does term life insurance work?
Life insurance is designed to pay a benefit when the insured person dies. The covered person often contributes significantly to the family’s income. As a result, life insurance is designed to provide financial security.
The death benefit amount for a term life policy depends on how much coverage you purchase. Once you decide how much money your family would need if you pass away — including taking care of debt obligations, funeral expenses, child care, college tuition, and basic needs — you then need to decide how long the specific term of your policy should be.
Your monthly premium will be based on the number of years your policy lasts and how much the policy pays out as a death benefit. On top of that, the insurer might consider your health, and you might need to provide your medical history. As long as you remain up to date on your premiums, your family will be able to receive the policy’s death benefit if you pass away during the specified term of your policy.
Often, it makes sense to get some type of life insurance policy early on, just in case you have an illness later or experience some other factor that can make it difficult to get life insurance.
If you pass away during the policy term, your family can submit the appropriate paperwork to the insurance company and receive the payout. It’s important to note that a life insurance death benefit is not considered taxable income.[2]
Read More: 13 of the Best Term Life Insurance Companies
Important term life terminology
As you consider insurance coverage, it’s a good idea to familiarize yourself with different types of term life insurance products and their features:
Level term: This is the most popular type of term life insurance. It means your guaranteed death benefit is the same throughout the policy term.
Decreasing term: With this type of term life insurance product, the death benefit reduces over time, usually each year.
Renewable term: At the end of a specified period, it’s possible to renew this policy for another term. There might be a limit on the number of additional terms, and you might pay more when you renew the policy. But it’s a way to renew term life insurance after the end of the initial term, often without needing another health check.
Return of premium: Generally, you don’t get a portion of your premium back, even if you’re still alive at the end of the term. But some life insurance companies offer a return of premium, which provides policyholders with a portion of their premium back if they haven’t filed a claim when the policy expires.[3]
Premium: This is the amount of money you pay at regular intervals (often monthly) to keep your policy active. With a level premium term life policy, these payments stay the same throughout the term.
Benefit: This is the amount of money paid to your beneficiaries upon your death.
Beneficiary: This is the person designated to receive the benefit if you die. You can have more than one beneficiary. Additionally, updating beneficiaries after life changes, like divorce and death, is a good idea.
Ratings: In some cases, you might pay an additional charge on top of your standard insurance premium. These ratings can result in higher rates because someone might have a hazardous job or another situation that could result in an earlier death.
Rider: This is a way to add an additional benefit to the life insurance policy.
Annuity products: Some types of life insurance products result in regular payments. A life insurance policy death benefit is sometimes paid out as an annual annuity rather than all at once.
Examples of term life insurance policies
When getting term life insurance, start by determining how much you think you’ll need to provide for your family if you pass on. For example, one recommendation is to get between 10 and 15 times your current income. So, if you make $35,000 per year, you might want to get between $350,000 and $525,000 in coverage.
Let’s say, however, that you want to provide for your family, pay off debts (including credit cards), and ensure that your children will get a good start after they graduate high school. In this case, you might choose to get more life insurance coverage. On the other hand, if you need a more affordable price or your partner has income, you might choose less coverage at a lower rate.
Carefully weigh your family situation and coverage needs, and consider talking with a financial advisor about what makes sense for you.
