Term Life Insurance: What You Need To Know
What Is Term Life Insurance?
Term life insurance will pay a tax-free lump sum of money to the loved ones you designate as beneficiaries on your insurance policy if you pass away within a certain period, such as 10, 15, 20 or 30 years. Say you purchase a 20-year term, $250,000 life insurance policy. If you die five years later, your beneficiaries would receive the full $250,000. And they won't have to pay taxes on it. The key to term life insurance is the term -- if you die after the 20-year term expires, your loved ones won't receive a payout. There are permanent life insurance policies that don't expire, such as whole life insurance, universal life insurance and variable life insurance.
Cameron Ellis, an assistant professor in the Department of Risk, Insurance, & Healthcare Management at the Fox School of Business at Temple University, advises that it's a good idea to get life insurance as soon as someone else depends on your income. "This could be when you and someone else sign a lease together or purchase a car/home. Or it could be whenever you have children. If one spouse is 'stay at home,' I would still recommend they purchase some life insurance. Even though there is no lost income, replacing the lost childcare and domestic duties can be very expensive," Ellis adds.
Term life insurance is the simplest type of life insurance to get and it's become even easier to get approved these days. Carrie Skogsberg of COUNTRY Financial Life Insurance explains, "Insurance companies are offering term life insurance products today that speed up the underwriting process and may not include a medical exam for policies within a certain benefit amount and for a person under a specific age, say 50 years old."
Term Life Insurance Definitions
Before you get too far, there are a few life insurance definitions you should know. They'll come in handy when you're researching the best term life insurance:
Beneficiary -- The person or persons who receive the life insurance payout if you die during the term.
Convertible term life insurance -- This type of term life insurance policy lets you move to a permanent policy during the term.
Death benefit -- The amount that your beneficiaries receives after you die.
Permanent life insurance -- A life insurance policy with no expiration date.
Premium -- The monthly or quarterly life insurance payment.
Rider -- An optional coverage or rule you can add to your life insurance policy.
Term life insurance -- The policy covers you for a term or set period.
Underwriting -- This is the process in which an insurance company evaluates your life insurance and figures out whether to insure you and how much to charge for premiums.
How Much Does Term Life Insurance Cost?
Many factors go into the cost of term life insurance, including age, gender and health status.
What Happens If I Outlive My Term Life Policy?
Your loved ones won’t receive any death benefit when you die if you outlive your term policy. Surviving your policy is one reason some people may shy away from term life. There is an option -- return-of-premium term life policies will repay you the amount you paid in for coverage at the end of the term. However, those plans cost much more than regular term life policies. You'll have to weigh whether the extra cost is worth it -- it may very well be if you get your money back at the end.
Medical Exam For Term Life Insurance Vs. No Medical Exam Life Insurance
A medical exam may be required when applying for a standard term life insurance policy. The exam will cover your height, weight, medical history, smoking habits and include a blood and urine test. These tests will look for specific medical problems. The results may hinder you from getting approved for insurance or you may wind up with much higher rates depending on the outcome. If you have health issues insurers would find high risk, such as diabetes, high blood pressure, cancer or other pre-existing conditions, you have options:
Look for a "no medical exam" term life insurance policy, known as guaranteed issue term life insurance.
Consider simplified issue life insurance. You don't have a medical exam, but you answer a handful of health-related questions.
Find insurers that provide diabetes life insurance. John Hancock, Lincoln and Prudential offer life insurance for diabetics.
Buy convertible term life insurance. You can convert your term life policy to permanent life insurance without having to answer health questions.
How COVID-19 Is Affecting Life Insurance Medical Exams
You've already learned that the best time to buy life insurance is now while you're younger. There's another good reason to buy life insurance now -- the COVID-19 pandemic. Some insurers aren't requiring medical exams at this time.
When Term Life Insurance May Be Good For You
The biggest difference between term life and permanent life is that term life covers you for a specific period. Permanent life stays with you no matter your age, as long as you pay the premium. Term life is usually the more affordable choice, but make sure you understand term life's downsides. That includes not building cash value and losing coverage once the policy ends. Losing your policy means you'll need to make sure you have other ways to fund final expenses and any other outstanding debt like a mortgage and college bills.
Here's when buying a term life policy would likely work better for you:
You don't have much money to put toward life insurance.
You want to make sure your family gets protection through your middle-aged years. A 20-year policy could take you through your most productive years.
You want to maximize a potential benefit. Term life often pays out more for less money than permanent life. The downside is you can outlive a term life policy. You may have the option to convert to a permanent life policy near the end of your term life policy, though.
Not sure which way to go? Check out our term life vs. permanent life comparison page.
How Much Term Life Insurance Do You Need?
When deciding how much life insurance you need, think about:
How much it will cost to replace your income
The services that you provide your family, such as child care
Your outstanding debts, such as mortgages, credit card bills and loans
Long-term financial commitments, such as paying for your child's college
Term Life Extras And Riders
Term life policies can include extra features or riders. For example, your policy may consist of an accelerated death benefit. This type of rider lets people who are terminally ill, have a chronic illness or in long-term care tap into life insurance, while still leaving your loved ones with the remaining life insurance benefits.
You may also receive a disability waiver of premium, which grants you a waiver on paying your premiums if you're disabled for at least six months. And some policies offer double or triple the payout if the death is an accident.
Here are common term life riders:
Accidental death -- As you might expect, this rider pays out more money if you die in an accident. By getting this rider, you usually double the payout. So, let's say you have a $250,000 term life policy with an accidental death rider. Your family would get $500,000 if you die in an accident.
Family income benefit -- This rider will provide income in case of the death of a family member. Let's say your spouse dies. You no longer have that income, so making mortgage payments may become difficult. This rider provides funding to help you in that situation.
Guaranteed insurability -- This rider lets you add onto your policy without going through a medical exam later. You may find that you need a larger policy. If you have this rider, you won't have to go through an exam before the insurer expands your policy.
Long-term care waiver -- The rider helps if you need long-term care in a nursing home or home care. There are also separate long-term care policies, which are called combination life insurance.
Waiver of premium -- The rider waives your premium if you become totally disabled or you lose your income because of injury or illness.
There are many term life rider options, but you'll want to consider whether the riders are worth it.
At the end of the day, Spero is here to help you decide what you need.