Term life insurance is probably the most common form of life insurance on the market today. A large number of the policies being marketed to people as affordable options, including mortgage protection policies, are forms of term life insurance. But what that means and for whom a term policy is best are often causes of confusion among life insurance buyers. Fortunately, it is easy to understand.
What Is a Term Life Policy?
At its most basic level, a term life insurance policy is a policy with a set death benefit that is meant to be in force for a specified period of time. Term life policies vary significantly in length, generally ranging from 1 to 30 years, and usually increasing by 5-year increments, which means that you can purchase 5, 10, 15, 20, 25, and 30-year plans.
Term policies either expire at the end of a pre-determined length of time, or continue on — but at an annually increasing cost after the set level period. They may be converted to a permanent life insurance policy if coverage needs to continue. Of course, there is also the option to purchase another term plan. Because they are issued for a shorter time period than a permanent policy — which is intended to be in force for the duration of the policyholder's lifespan — they are often more affordable. The shorter the term, the lower the premiums, allowing you to take out a larger death benefit amount for a lower payment.
Why Term Life?
The fact that term life insurance is more affordable is the main reason people choose it. Term policies are the perfect choice for anyone who needs a large amount of coverage for a relatively short period of time. Mortgage protection is an excellent example of how this works. Many people choose to take out a term life policy for the duration of their mortgage; this way, if anything were to happen, the family left behind could keep the house. Thus, the policy would be in the amount of the mortgage for the term of the mortgage, often 30 years.
Term life is also a popular choice among new parents who want to ensure that they can provide for their children while they are still dependents, up to the age of 18 or longer if desired. It allows parents to have a significant amount in death benefits to leave for their children at a lower cost than a permanent life policy.
Term life is often easier to obtain than a permanent policy, with some options available that require little to no information about your health. This means that it can be accessible to people who might be turned down elsewhere.
What Happens When a Term Policy Expires?
Although the end date of the policy is technically an expiration date, after which you are not obligated to pay premiums and no longer have coverage, most insurance companies offer the option to convert your policy. This allows you to continue the coverage if you feel it's still needed — for example, if you have taken on a new mortgage and want to continue having coverage for your debt. It's important to note that a new medical exam will not be required for conversion and you may convert all or part of the death benefit. Another plus is that you will retain the original policy's rate class, so if your health has significantly deteriorated it will not factor into the cost. Your older age will be a factor, however.
Some people choose to avoid this by taking out a larger term policy in conjunction with a smaller permanent policy. This allows you to not only have the larger death benefit when you need it most, but also to lock in a lower rate for the duration of your life on a whole or universal life policy to cover things like final expenses.
Who Should Consider a Term Policy?
A term life insurance policy can work for nearly any life insurance buyer since there is such a wide range of options. It is popular among newlyweds and new parents who need to balance the expenses of their changing lives with their need to protect loved ones from the unexpected.
Term life policies are also a good choice for seniors who want to provide for their final expenses but whose age or health prevents them from obtaining a permanent life insurance policy at a reasonable rate.
Anyone with a large amount of debt who wants to ensure that it can be paid off in a specified period of time will also find a term policy to be a good choice. This includes mortgages, large student loans, business loans, and other similar debts. Term life insurance can prevent family members from being left with a debt to pay and it can make the coverage more affordable while paying that debt down.
In sum, term life insurance is a good choice for anyone looking to keep premiums down while still obtaining a good amount of coverage. While it doesn't last as long as permanent life insurance, it will get most people through the portions of their life in which the coverage is needed the most.