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What Is Term Life Insurance?

Term life insurance is an important risk-management tool. In exchange for annual premium payments, a term life policy pays out a pre-determined amount if the insured party dies during the policy’s term. Since this type of policy remains in force for a fixed period of time and has no cash value, it costs significantly less than other forms of life insurance.

The Difference Between Term Life Insurance vs. Whole Life Insurance

Term life policies differ from whole life plans in several respects. First, whole life insurance, which is also known as “permanent life insurance,” never expires. In other words, a whole life policy is guaranteed to pay out at some point. As such, this type of insurance resembles a managed investment vehicle to which the insured party makes regular contributions over time.

Since a typical whole life policy has an inflation-protected cash value that rises over time, it may be canceled and “cashed out” at any time before the insured party’s death. By contrast, term life policies do not return their accumulated premiums upon cancellation. They pay out a fixed amount, known as the “face value,” in only one circumstance: the death of the insured. In both cases, plan beneficiaries are not required to pay taxes on the death benefits that they receive.

The Pros of Term Life Insurance

1. Term Life Insurance is Cheap

Term Life insurance is the cheapest form of life insurance coverage available. That means that you get more bang for your buck. The same money spent on term coverage will get you much more death benefit than a permanent life insurance policy.

2. Term Life Insurance is Easy to Purchase

Term Life insurance is not a complicated financial product. That means that its easier for you to both shop for term life and compare term life quotes. With term life insurance you basically need to make just two decisions. First, you need to decide how much coverage you want. Once you know that, you need to decide how long you want coverage for. You can typically get a term life policy for 10,15,20,25, or 30 years. The longer the term period, the higher the monthly premium will be.

3. Term Life Insurance Covers a Temporary Need

If you feel like you only need coverage for a set period of time, term life insurance is a good choice. For example if you have little kids and want coverage until they are out of college, a 20 or 30 year term policy might be good enough for to fill that temporary coverage. Or if you are 50 years old and want a policy that will cover you until you retire at age 65, a 15 year term policy may be perfect for you.

Cons of Term Life Insurance

1. Term Life Insurance Expires

Term Life insurance is for a set amount of years. That means that if you purchase a 30-year term policy and you outlive the 30 years, your policy can expire. You do have the option to renew after 30 years, but its most likely that the renewal rate will be unaffordable to you or simply more expensive depending on your health at that time.

2. Term Life Doesn’t Offer a Return

Term Life insurance is not a savings vehicle. That means that if you do outlive your policy, you don’t get back the money you spent on the policy (unless you have return of premium term life insurance).

If you’re trying to decide between a term and permanent policy, deciding how much coverage you need, why you need the coverage, as well as comparing rates can help you determine what will be best for your family. At Chooseterm.com we can help you compare term life and permanent life insurance policies.

How Much Will a Term Life Policy Cost?

A term life insurance policy’s cost depends in large part upon the length of its term, which can be as short as one year and as long as 30 years. Although the likelihood of a term life policy paying out over a given one-year period is low, many one-year policies offer insured parties the opportunity to renew their benefits for a set number of annual terms.

Annual Renewable Term vs. Level Term Policies

Known as “annual renewable term” or ART insurance, premiums for this form of protection rise slightly each year until the annual term limit has been reached. At this point, the insured party may reapply for coverage. If the insurer agrees to issue a new policy, its annual premiums may rise significantly to reflect the insured party’s increased likelihood of death.

“Level term” policies, which charge a stable premium for a fixed span of time, are more common than ART plans. Level term policies usually remain in force for 10 to 30 years, depending upon the age of the insured party and their willingness to accept higher premiums. Since the likelihood of death increases with age, 30-year policies carry higher annual premiums than 10-year policies. As with ART plans, these rates will spike upon renewal.

Death of the Insured Party

If the insured party dies while their term life policy remains in force, its beneficiaries will receive the plan’s full face value. They may dispose of these funds as they see fit. Common uses for term life insurance benefits include funeral costs, student loans for dependent children, debts incurred during end-of-life care for the insured party, and even everyday household expenses.

Overall Cost-Effectiveness of Term Life Insurance

Many term life insurance policies expire worthless and must be renewed. As such, they cost significantly less than whole life insurance policies, which must pay out sooner or later. Since term life policies that do end up paying out offer their beneficiaries an excellent return on the insured party’s investment, financial planners consider these plans to be more cost-effective than their whole life counterparts. However, potential policyholders should determine whether they can stomach the loss of their premiums if they outlive their policy’s term.

What Kind Of Options of Payouts Are There?

Most term life insurance plans come with a dizzying array of payout options. While some offer obvious advantages for plan beneficiaries, many are structured to favor underwriters.
What Options do I have for Death Benefits?

Lump-Sum Payment

A term life insurance policy may pay its death benefits in one of three ways. If the beneficiary opts to take a  lump-sum payment, the underwriter must pay out the policy’s full face value via check or electronic deposit. Lump-sum payments do not accrue interest: A $200,000 policy will pay out exactly $200,000 upon the death of the insured party.

Although they are not the most common payout option overall, lump-sum payments may be useful for heavily-indebted beneficiaries.

Annuity

If the beneficiary opts to receive the death benefit as an  annuity, they may be presented with a staggering menu of choices. No matter how the beneficiary elects to receive their annuity payments, this payout method confers one major advantage: all unpaid benefits accrue interest over time.

Annuity payouts come in several forms. Beneficiaries may receive “life only” payouts, which are calculated according to their life expectancy and include accrued interest, every year until they die. Upon their death, payments terminate and the insurer keeps any balance that remains.

“Period Certain” vs. “Amount Certain” Payout Options

Beneficiaries may receive “period certain” payouts in equal amounts over a fixed period of time, usually ranging from five to 30 years. If the beneficiary dies before the period ends, payments may be transferred to a surviving recipient.

Like “period certain” payouts, “amount certain” benefits pay out in equal amounts until the face value of the original policy has been exhausted. Beneficiaries may specify the amount to be received each year. The payout period’s duration depends entirely upon the size of each installment.

Since they are made up solely of the interest generated by the original policy’s face value, “interest income” payouts are far smaller than other annuity installments. Of course, beneficiaries can elect to receive the full value of the interest-generating principal at any time.

Since they offer a guaranteed stream of income for a multi-year period, annuities are the most common term life insurance payout option. Within this category, “period certain” payouts are among the most popular.

Interest-Bearing Accounts

The majority of term life insurance beneficiaries still opt to receive benefits either in a single payment or as a permanent annuity. However, many insurers now offer  interest-bearing checking accounts  with full check-writing privileges. These enable beneficiaries to exercise complete control over their funds, drawing upon their accounts as much or as little as they see fit. For insurers, they represent a valuable source of investment income.

Term Life Insurance For Couples

A lot of people tend to think that once they get married, they need to combine their life insurance policies or even do away with their old policies and purchase joint life insurance. But this isn’t necessarily the case, and in fact it is recommended that each person purchase his or her own term life insurance policy. There are a variety of reasons for this, which we’ll go over here.

Separate Policies Provide More Options

Each person is able to get coverage from the insurance company of their choice, rather than having to find one that works for both (and with joint policies, you options are limited in terms of companies that offer them). Different insurance providers will offer different rates, so you will be able to each “shop around” (which you can do using the quote tool on this website) and get the best coverage possible based on your individual health histories and life situations. So, if your spouse has a health condition, it will not affect the policy you get.

Premiums Are Cheaper

Since separate insurance policies just cover the individual, the premiums are generally cheaper than they are for joint policies. This is important if money is of concern, as it is for many younger couples that may not have much saved up. This is also more convenient for couples that do not have combined bank accounts.

Separate Policies Benefit Children More Than Joint Policies

When you buy a “joint” policy they are usually a “first-to-die” type of policy. What this means is that if one partner/spouse passes than the death benefit pays out. However the surviving spouse is left without coverage. This is not an ideal situation to be in if you have children as each one of you should have coverage, and with separate policies you will both have you own coverage that doesn’t stop if one of you passes.

Separate Policies Simplify Divorce

It’s something nobody wants to think about, but it is something that needs to be considered. People who are recently married often assume that divorce will never happen to them, but the reality is that things can change, and many couples do end up splitting. If you have separate policies, all you will need to do (if you even want to) is change the beneficiary. This keeps things simple and saves a lot of extra, unnecessary strain.

How Long Does It Take To Be Approved?

A term life insurance policy application generally involves several different steps. How easy or complex these steps are will vary based on the policy itself. The application for a guaranteed-issue policy is much simpler and faster than the application for a policy that requires a medical exam, which has several more steps and may take a considerably longer time to process.

The application is the first step for any type of life insurance policy. This can be completed in as little as one day. A no-medical exam or guaranteed-issue life insurance policy may take from seven to 10 days while a medical exam policy can take up to two months after the application has been completed for the applicant to be accepted.

No Medical Exam Policies

Some no-exam policies require a phone or in-person interview, which may repeat many of the questions already answered on the life insurance application. This interview will usually occur within one to three days of the insurance company’s receipt of the application. Within one to three more days, the policy will be approved, issued and mailed. A guaranteed-issue policy will often be in effect as soon as delivery has been confirmed, although there may be some restrictions placed for the first one to five years of the policy’s life. Guaranteed-issue life insurance policies are easier to apply for, but they also tend to be more expensive because the insurance assumes greater risk.

Medical Exam Policies

Insurance companies may require detailed information from applicants for life insurance policies so that they can more accurately assess the amount of risk they are assuming and can name an appropriate premium for the policy. Because the process is far more in-depth than it is for a guaranteed-issue policy, it can take significantly longer to complete.

Once the application is received by the insurance company, the applicant will be required to complete a medical exam. This will usually need to take place within one to three days. Once the exam is completed, the information will be sent to the underwriter, who will verify records and personal and financial history. The underwriter will assign a risk category and will then offer coverage at a specific premium price. The applicant will have the option to accept or refuse this offer. If the offer is accepted, the policy will generally be issued within a week.

Five Questions You Should Ask When You Buy A Policy

If you’re researching term life insurance online you’re probably visiting multiple sites and getting quotes. You’re trying to figure out if you should quote yourself at standard or preferred rates, which companies are high quality companies, which policies require an exam, and other questions that can make the whole process highly confusing. Here are some things to ask when choosing a term life insurance policy so that you know exactly what kind of policy you’re getting.

Does the rate stay the same or increase over time?

If you’re getting a term policy, make sure it is a level term policy. This means that the price of the policy will stay the same throughout the term length. That means if you buy a 20 year level term policy the price should stay the same for the entire 20 year term. Look out for small print that says your rate increases every 5 years.

Is it convertible?

You may never decide to go from a term policy to a permanent policy but you never know – having the option is worthwhile. Why? Because if your health deteriorates you may decide to convert the policy to a permanent policy since it will be difficult to get insurance when your term expires.

Find out if the policy is convertible, but don’t stop there. You need to know if it’s convertible in the first 10 years, 20 years, or not at all. You should also find out if it’s convertible to a universal policy or whole life. The more choices you have the better.

Is there a waiting period?

Some life insurance policies have a waiting period before 100% of the death benefit is in effect. These policies should only be used if you can’t get approved for a regular policy. Unless you are considered “high risk” don’t pursue this option.

I’ve never heard of this life insurance company?

It’s possible that you haven’t heard of the life insurance company that has the best rate. That doesn’t mean that they aren’t a good company. Find out the company’s A.M Best Rating. Any company with an A or A+ rating is financially sound. Look for companies that have been in business for at least 50 years.

Is there a medical exam required?

You can typically get up to $250,000 or even up to $350,000 of life insurance without an exam. Find out if you are being quoted for a policy with or without an exam. While no exam policies don’t require a paramedic to make a house call and take a blood and urine sample their cost is typically higher than policies that require an exam. Compare your options and decide which is better for you.

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Liran Hirschkorn

Liran Hirschkorn is the founder of Chooseterm.com. His mission is to help individuals across the country in finding the best rates on life insurance as well as helping individuals with high risk life insurance.

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