What are the Advantages of Term Life Insurance?
November 1, 2022
Term Life Insurance offers temporary financial protection, usually 5 to 30 years, for a low, fixed cost. Term life insurance is particularly attractive to adults who have significant, temporary needs to cover. It doesn’t have a savings or investment component; it simply covers certain costs of those people outlined in the policy. Read on to learn more about the advantages of term life insurance, as well as the differences between term life and whole life.
How does it work?
Term life insurance is easy to understand. When you apply, simply select the length of time and amount of coverage you estimate you’ll need to cover costs. You have the option of choosing one or more beneficiaries to receive the death benefit when you pass on. Once your application is approved, you enter into contract with the insurance company. It’s as simple as that. As part of the contract, the company agrees to pay your death benefit, or the amount of coverage paid to your beneficiaries in the event of your passing, in exchange for your on-time premium payments. If you die before the term is over, the beneficiaries receive the death benefit in a lump sum payment, tax free. If you’re still alive when the term ends, you can:
- Cancel the policy if you no longer need the coverage
- Renew the policy at your current age
- Convert part or all of the death benefit to a permanent life policy, like whole or universal life
Why buy Term Life insurance?
Term life insurance has benefits for many different use cases. Here are some examples:
- Young, newlywed couples. This is the best time to buy term life coverage. The younger you are, the better your rates will be. The benefits can be used to replace income, pay off outstanding debts, and cover future financial needs.
- Business owners. Business owners can use the benefit to pay off debts and outstanding taxes. The details are outlined in a buy-sell contract, which is especially important if ownership or shares in the company are to be transferred to another party.
- Sole financial providers / stay at home parents. Losing a sole source of income can be detrimental to a family. The remaining parent can use the death benefit as income replacement, allowing them to stay at home with their children instead of going to work right away. The proceeds can also be used to pay for everyday expenses, current and future childcare and education costs.
- Individuals with significant debts. The death benefit from your policy can be used to pay off significant debts in your name.
Types of Insurance
Decreasing Term Plan
Your benefit decreases monthly or annually at a predetermined rate throughout the policy term. While the death benefit goes down over time, your premium doesn’t change, making this a less affordable plan, normally. This plan can be ideal for beneficiaries looking to pay off debts that decrease over time, such as loans or mortgages.
Annual Renewable Plan
This option ensures insurability by allowing you to renew on a year-to-year basis without having to reapply or take a medical exam. However, your premium increases each year while the coverage amount remains the same. These plans can only be renewed up to a certain age, which varies by carrier. Best suited for short-term debts that can be paid off within a year or two, such as personal or small business loans.
Level Term Plan
This plan is the most attractive option, because your premium and death benefit stay the same throughout the duration of your policy. This option is more cost effective in the long-run, even if at first glance it looks to be more expensive. A good option for someone looking to cover their family’s immediate and future expenses.
Advantages of Term Life
Pros of Term Life
- Easy to understand. Life insurance can be complicated, but term life is easy to understand because it provides a death benefit if you die within the policy term, as long as premiums are paid.
- Inexpensive. About half of Americans overestimate how much term life insurance costs, thinking it costs three times the actual price. Term life insurance is the best option for most because it offers extensive coverage at a budget friendly rate.
- More coverage available. After determining how much life insurance you need, you may be surprised to see the final figure is $1 million or more. You can buy up to $10 million of coverage on most policies, which gets you all of the coverage you could possibly need for the average family, and then some.
- Tax-Free Death Benefit. If you die during your policy term, your beneficiaries will receive a lump sum from the life insurance company. Luckily, term death benefit proceeds are tax-free, so your beneficiary can keep the full amount to use as they wish.
- Flexible payment and policy options. Term insurance offers several payment and policy options. You can choose to pay your premiums monthly, quarterly, semi-annually, or annually. Most life insurers charge a processing fee if you don’t pay once per year, so you may be able to save with an annual payment. You can also choose how long you need the coverage, whether 1 year or 30 years.
- No penalty for cancelling. If you decide to cancel your term policy while it’s active, you can without incurring any fees or penalties.
Cons of Term Life
- Temporary coverage. If you have permanent life insurance needs, like funeral expenses or caring for a special needs child into adulthood, term life may not be the best fit for you.
- No cash value. Term life doesn’t build cash value, meaning it doesn’t include a savings account to borrow from or withdraw against. If you cancel a term policy, you don’t get any money back unless you get a policy that offers a return of premium feature, which comes with higher costs. This differs from permanent life insurance, which provides a surrender value based on the cash savings account if you cancel the policy.
- Upper age limit. Term life has a lower upper age cap than permanent life insurance. Though the maximum age limit varies by company and term length, most people can apply up to age 50 for all term lengths. Once you reach 60 or older, you may be limited to buying a 10 or 20-year term, without the option for a 30-year term.
Term Life Vs Permanent Life Insurance
Term Life Insurance and Permanent Life Insurance offer many similarities, but they also have some stark differences, such as:
Term Life Insurance offers level, relatively affordable premiums but has no investment or savings vehicle attached like permanent life insurance. Though permanent life insurance is more expensive, it provides lifetime coverage. If you are young and healthy when you buy it, permanent life insurance is the cheapest, and rates will never increase.
You can also build cash value in a savings account over time with permanent life insurance, which can also be invested in the market if you choose the right policy. Mutual insurers may even offer dividends.
Interested in purchasing Term Life Insurance, or know someone who is? Visit our webpage, or contact one of our agents.