You don’t have to compromise quality and quantity when shopping for the best deal on life insurance. This guide on term life insurance definition can help you learn about how it works and the many advantages of getting a term policy that can meet your needs but won’t break the bank. Read on to get the basics on plan types, who term life insurance can benefit the most, and how to buy a policy that can help cover your family’s future expenses after you’re gone.

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Term Life Insurance Definition

Term life insurance is called a “pure” life insurance policy because its only function is to pay out a death benefit upon the policyholder’s death. The death benefit is designed to provide income replacement to cover short-term needs, such as paying off a mortgage or paying for a child’s college education. Term policies provide temporary insurance protection for a specific length of time. Most policies are sold starting at a 5-year term and then increasing in 5-year increments, typically up to a 30-year term. This means you can also get a 10-, 15-, 20-, 25-, or 30-year term policy.

How Term Insurance Works

  1. Choose policy term: The term you choose depends on how long your family would need income replacement after you’re gone.
  2. Choose death benefit amount: The amount you select is based on how much money it would take for your family to meet all their expenses for a certain number of years and what you can afford to pay in premiums.
  3. Take a medical exam or answer health questions: A medical exam along with lab work is required for fully underwritten policies—premiums are usually lower if you’re in good health. Answering a few health questions on the policy application is the only requirement for simplified issue policies.
  4. Pay premiums: Premium rates are based on many factors. But you usually pay much less when you’re young and healthy.
  5. Beneficiary gets death benefit when you die: As long as your policy is active when you die, your beneficiary will receive a death benefit payout.

Types of Term Insurance

To understand more about term life insurance definition, you also need to learn about the types of term policies available. Most policies that are issued for a 5-year term or longer are called level term policies. The most popular level term policy is the 20-year term, according to the Insurance Information Institute. Level applies to both the premium rate and the death benefit amount. Premiums can remain fixed for the full length of the term or only for a specific period during the term, at which time the premium may increase. If you have a 20-year term policy with an annual premium of $200, for example, you could pay $200 every year for all 20 years or only for the first 10 years. In regard to the death benefit, the amount stays the same for the entire length of the policy.

Other types of term life insurance that are not widely available to individual consumers are:

  • Annual renewable term: Provides coverage on a 1-year contract basis, with premiums increasing every year you renew
  • Decreasing term: Death benefit gets lower by a certain amount every year during the term
  • Increasing term: Death benefit goes up by a specific amount every year during the term—as the death benefit increases, the annual premium usually gets higher each year

Why Get Term Life Insurance?

It’s Easy: Term insurance is fairly easy to shop for, and you can compare prices from different insurance companies. It’s also a basic type of life insurance, so it’s easy to understand.

It’s Affordable: Term insurance usually provides the most death benefit per dollar when compared to permanent life insurance. For instance, if you have a term policy and a permanent policy with the same death benefit of $500,000, you usually will pay less in premiums for the term policy.* This is because term policies don’t provide the ability to build cash value the way you can with permanent insurance.

When you compare term life insurance definition and cash value insurance, cash value plans allow the policy owner to get money or a loan from the policy while he or she is alive. However, having this feature means you will likely need to pay a higher premium, but much of that premium will go into your policy’s cash value. Although term policies don’t hold any value when the term ends, not having this feature often makes the cost less. You may even be able to get a term policy for less than $1 per day.

Here are some examples of term insurance rates:

  • A healthy 30-year-old female with a 20-year $500,000 term policy could pay $215 a year in annual premiums—this works out to around $18 a month or 64 cents a day on a 28-day billing cycle.
  • A healthy 30-year-old male with a 20-year term policy worth $500,000 could pay $250 a year in annual premiums—this comes out to about $21 a month or 74 cents per day.

If you’re wondering why the cost is slightly higher for a male who has the same policy as a female, this is because the life expectancy for males is shorter when compared to females. There’s more possibility that an insurance company would have to pay out a death benefit claim on a male policyholder, which makes the premium higher. Besides gender, there are other factors that determine your premium rate.

It’s Flexible: Term plans allow you to get life insurance only for the years you need it. And longer term plans let you take advantage of getting coverage for the years when you need the most income replacement.

It’s Renewable: You can renew your policy for additional terms up to a certain age, which is usually 80. Although premiums typically increase each time you renew, the good news is you don’t have to show any proof of your health. So even if your health has declined over the years, your policy will automatically renew as long as you continue to pay premiums on time.

It’s Convertible: Most term policies are designed so that you can convert them to a permanent life insurance policy regardless of any changes in your health, according to Investopedia. Insurance companies usually require that you do this before you turn 65 or 75. By converting to permanent insurance, you get the benefit of having a policy that could last your entire lifetime. In addition, it could build cash value you could use to supplement your retirement savings or transfer wealth to your loved ones.

Who Should Get It?

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Although it’s typically a suitable choice for most people, term life insurance definition can further be explained by who it’s usually the best fit for. These are some of the types of people who may benefit the most from having a term life policy:

Young families: In addition to the higher cost of raising small children, young couples who are just starting out may be first-time homeowners. So if the breadwinner in the family were to die before the kids are grown up and the mortgage is paid off, it would take a lot of income to meet daily cost-of-living needs. That doesn’t even include future expenses like college tuition. Term insurance allows young married couples with kids to stretch their budget by getting a larger amount of coverage for a lower cost.

Single parents: Many single moms and dads are successfully raising their children. Some are fortunate to have help from family members and friends. But even with help, a loved one may not be able to pay for all the things it would take to raise your children if you suddenly passed away. This is where life insurance comes in. It allows you to choose someone to be the beneficiary on the policy, so they can financially provide for your children until they start earning their own incomes. And with term coverage, you can get affordable life insurance protection.

Young married couples without kids: Even without kids, it may be hard to cover all your household expenses if you or your spouse were no longer around. This is especially true if you need two incomes to make ends meet. If your budget is already tight, term insurance offers the best option to get low-cost life insurance that can cover your spouse until he or she can get retirement benefits. If you will be starting a family soon, then you can plan ahead now by getting a lower rate while you’re younger with a death benefit that would be enough to take care of your family until the kids become adults.

Young singles: If you’re a young single and have no one who depends on your income, you may be thinking, “Why do I need life insurance?” If you’re planning on getting married and having kids, you will need it in the future. Also, you may have student loan debts for which a parent is the cosigner. Your parent would have to take over payments if you were to die, so getting a policy can help cover this expense. You’re young and healthy, so this is the best time to enroll in a policy to get a cheaper premium. And term insurance gives you the best opportunity to get life coverage for cheap.

You can get more information on defining term life insurance to decide if it’s right for you.

How Do I Buy It?

Tips on Buying Life Insurance

  • Get a quote: You can start a quote online or speak with an agent over the phone.
  • Compare quotes: Make sure you comparison shop to get the best deal from a reputable company.
  • Be honest: The accuracy of your quote will be based on the information you provide.
  • Take a medical exam to get premium discounts: Use your good health to lock in a lower premium now. Taking a medical exam now means you won’t have to take one when you renew a term policy or convert from term to permanent insurance.

Buying term insurance is based on two simple factors: your needs and your budget.

Your needs: If you have major expenses and several young children, the greater your need is for a larger death benefit and a longer policy term. When calculating your needs, you may also want to include children you plan to have and any large purchases you plan to make in the near future, like a house. If you have no dependents, then your need would, of course, be less.

  • Young couples with kids and single parents: A good way to estimate how much death benefit you need is to multiply your annual salary by 20 or 30. Those in their 20s can usually get a death benefit that’s up to 30 times their yearly salary, while those in their 30s can get up to 20 times their annual wage.
  • Married couples without kids and singles: Many financial sources, like CNN Money, suggest that a general rule of thumb when calculating how much coverage you need is to multiply your yearly wage by 10. This would result in having a lower death benefit, which may work best for those who have no dependents and a modest amount of debt.

Your budget: You can calculate your budget for buying a term life policy based on how much money you have left over after paying all your monthly expenses and putting some away in savings. Because term insurance is cheap and you can get a policy for less than $20 a month the younger you are, it shouldn’t take up that much of your budget. Look at it this way: If you were to skip one take-out meal a month, that extra money could probably cover the cost of your monthly premium.

Now that you’re at the end of this guide on term life insurance definition, you should have all the basics you need to know about buying a policy. But you may have specific needs or more questions about how term insurance works.

HealthMarkets can help you find the right coverage you need. You can call us at (800) 917-4169 to speak with a licensed agent. Or, meet with a HealthMarkets agent in your area who can help you choose the term life insurance policy that’s right for you.

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References

http://www.dfs.ny.gov/consumer/que_top10/que_life_ter.htm | http://www.iii.org/article/what-are-different-types-term-life-insurance-policies | http://www.tdi.texas.gov/pubs/consumer/cb018.html | http://www.kiplinger.com/article/insurance/T034-C000-S002-buying-life-insurance-at-every-life-stage.html | http://www.investopedia.com/ask/answers/08/term-life-insurance.asp | http://www.cbsnews.com/news/do-you-still-need-life-insurance/ | http://money.cnn.com/retirement/guide/insurance_life.moneymag/index11.htm?iid=EL | http://www.investopedia.com/terms/c/convertible-insurance.asp

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