What Is Term Life Insurance?

Life insurance is an insurance product that provides a death benefit to the covered party if they die within the specified time period.

Because there is an end date for life insurance, it is generally cheaper than forms of permanent coverage, such as whole and universal life insurance, which do not expire. Understanding the benefits and drawbacks of life insurance can help you decide what type of policy can provide the best protection for your family's needs.

What is term life insurance?

Life insurance is somewhat inappropriate since this type of insurance pays in the event of the death of the covered person.

Buying a life insurance policy is a strategy you can use to protect the people who depend on you financially in the event that you die unexpectedly. In exchange for monthly or annual premiums, your family will receive a generally higher death benefit than the sum of the premiums (if you die with an active policy).

Life insurance, which is considered "pure life insurance," provides this death benefit if the covered person dies during the specified policy term. Insurers generally offer terms ranging from one year to 40 years.

Your insurer may allow you to renew your life insurance policy without having to reapply for coverage when the term expires, but the new premium will be based on your age at the time of renewal, which means it will be higher. If a renewable resource does not exist or is not exercised, life insurance coverage ends when the term ends.

How does life insurance work?

The vast majority of life insurance is "regular term," which means that the benefit amount remains the same throughout the term. However, some policies offer a "declining term" benefit, which means that the benefit amount decreases at regular intervals (usually once a year).

If you are thinking of purchasing a life insurance policy, you should start with an idea of ​​how much death benefit you would like to provide to your beneficiaries and for how long.

Consider your family's financial resources, as well as any outstanding debts you would like to pay off, such as a mortgage. The amount of the death benefit, or policy amount, is an important factor in determining how much you will pay in premiums. The insurer will also take into account factors such as:

Office term
age, sex and health
Occupation
Lifestyle and habits, including things like smoking and high-risk hobbies.
driving record
Medicines
family medical history

Since age and health directly affect the cost of life insurance, people in excellent health will pay less than their peers, while people with poor health will pay more. Smokers generally pay more for life insurance coverage.

If you die during the term of the policy, the insurer will pay your beneficiaries the amount of the benefit. Life insurance earnings are generally not taxed by the IRS, which means your family can count on the full amount of your policy as a benefit.

However, if the term expires before you and there is no renewal clause, the policy is complete and the insurer will not pay the death benefit to its beneficiaries.

For example, let's say Pat, a 30-year-old non-smoker in "Regular" health, buys a $ 250,000 20-year life insurance policy for $ 325 a year. If Pat dies during the policy term of 20 years, beneficiaries will receive the full death benefit of $ 250,000. However, if the policy expires, Pat will have to buy a new policy to keep the death benefit.

"Fair" is a rating used by some insurers for people who do not consider themselves to be in excellent health and who have minor health problems.

But at age 50, Pat will pay significantly more to maintain the same death benefit for another 20-year period. On average, between $ 955 and $ 1225 per year.

And Pat's ability to purchase a new policy may depend on uncontrollable health factors. A serious medical diagnosis (such as cancer) during the term of the first policy can make it impossible for Pat to qualify for a new policy at age 50.

Pros explained

Affordable - Insurance customers can generally pay higher death benefits with life insurance compared to permanent life insurance. For example, a 30-year-old who wants to spend less than $ 1,000 a year on life insurance premiums can pay for a $ 100,000 life insurance policy, but can buy a 30-year life insurance policy with a benefit. per death of $ 500,000. on the same budget.67

Coverage for the most financially vulnerable years: Life insurance generally provides a safety net during the years when the family needs it most. If you buy a multi-decade life insurance policy when your children are young or when you have a large mortgage, you can be sure that there will be enough money to educate your children or pay for the house, even if you pass away.

Cons explained

Coverage is not for life - Term life insurance coverage is only valid for the duration of the term, which can leave clients without coverage when needed.

To maintain coverage when the term expires, you will need to re-qualify for a new policy or renew your existing coverage (if your policy has a renewal clause). In either case, your prize will be higher. And if you have developed health problems, you may not qualify for a new policy.

No accumulation of cash value: With life insurance, you won't get back the money you spent on premiums unless you die during the term.

However, whole life insurance has a cash value in addition to the death benefit. The premiums you pay on your permanent life insurance policy go to your death benefit or an investment or savings account that you can access after a certain period of time.

 

We hope you enjoy watching this video about What Is Term Life Insurance?

Source: Marko - WhiteBoard Finance

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