August 20, 2024
What Is Term Life Insurance? | Your Comprehensive Guide | BetterLife
When you have life insurance, your loved ones are covered and protected after you’re gone.
It can be difficult to think about death, but it’s important to plan for how those who depend on you will be taken care of financially after you’re gone. Term life insurance can offer security by helping ensure their financial needs are taken care of.
Life insurance is a complicated subject. It’s important to understand all the options available before making any decisions, so we’ve compiled a comprehensive guide on term life insurance and gathered your questions in one place to help you make an educated decision. The information included below will provide answers for every question you may have about this type of coverage to ensure your family won’t be left with any financial burden, like loss of income or funeral expenses, after your death.’
What Is Term Life Insurance?
Term Life Policies vs. Permanent Life Insurance
How Does Term Life Insurance Work?
What Should You Know About Term Life Insurance?
Can You Cash Out a Term Life Policy?
The End of the Term
What is the Difference Between Term Life Insurance and Direct Term Life Insurance?
Can a Term Life Insurance Policy Be Used to Replace the Insured’s Income?
Choosing the Right Life Insurance Company for You
Who Has the Best Term Life Insurance Policy?
What’s Next?
Final Word
What Is Term Life Insurance?
A term life insurance policy guarantees a specified death benefit to the policyholder’s family members, loved ones, or other designated beneficiary/s in the event of their unexpected death.
Term life insurance is a contract between you and an insurance company that lasts for a specific period of time. The insurer pays a death benefit to your beneficiaries if you die during the term of the contract. Term periods may last 10, 15, 20, or 30 years; some companies offer life insurance term policies in five year increments as well. Unlike permanent life insurance, such as whole life or universal life, term life insurance doesn’t build cash value of the policy that you can borrow against, making it a more affordable option. With term life, you generally pay for the potential death benefit; higher premiums are needed to grow cash value with whole life insurance coverage.
Why Do I Need It?
The answer to this question is not a simple one. What it really comes down to, in the end, is that life insurance will provide your family with financial security should you die prematurely.
Whether you’re single, married with kids, or widowed, term life insurance is a financial security option many people could benefit from. Term life insurance is a more affordable insurance option to protect your loved ones in case something happens to you.
We find many families with young children often choose a term life policy that offers coverage for a period until their children would no longer require financial assistance. For example, many families pick term policies with coverage up until their child turns 18 years old, or reaches graduating senior status at high school. Beneficiaries can use the payment for mortgage payments, student loans, funeral costs, or living expenses.
If you are still unsure if you need life insurance, you can learn more here.
Types of Term Life Insurance
There are four main types of term life insurance policies: level term insurance, group term life insurance, decreasing term insurance, and yearly renewable term policies. Naturally, the best option will depend on your individual circumstances; we have summarized the four types below:
Level Premium or Level Term Life Policies
The premium payment and death benefit for this type of policy are both fixed for the term life. However, in order to account for the increasing costs of insurance over the life of the policy, the premium payments for level term will generally be higher than those for a yearly renewable term policy.
Group Term Life Insurance
Group term life insurance provides coverage for multiple people under a single policy. In addition, the premium is considerably lower than individual policies, making it a more affordable choice for middle-income earners.
Businesses often use this type of policy to offer their workers life insurance at discounted rates.
Decreasing Term Policies
A decreasing term policy lowers the death benefit year-over-year, leading to a proportionate decline in risk to the insurer. The reduced risk allows the insurer to offer a lower fixed-rate premium when compared to a standard level premium policy.
A predetermined schedule governs the decline in the death benefit amount.
These policies are often used alongside a mortgage to safeguard loved ones from losing their primary household income before paying off the mortgage.
Yearly Renewable Term Policies
These policies are renewed each year by the insurer without requiring insurance eligibility documents or medical exams. As a result, yearly renewable term (YRT) policies see an increase in premium proportionate to the policyholder aging.
Since this can become more expensive in later stages of life, this isn’t one of the more popular life insurance policies.
Term Life Policies vs. Permanent Life Insurance
There are few differences between the two, but they are undoubtedly important. So let’s take a look at the main ones.
Insurance Term Life
The most obvious difference is the insurance term length. Term Life insurance policies insure the policyholder for a specified period of time. Permanent life insurance on the other hand is broken into two different types, whole life or universal, both covering the policyholder for life.
Premium Cost
With whole life policies (permanent life insurance), you’re paying level premiums. By doing so, in the early years of the policy you’re paying higher premiums so that the premium rate can remain level throughout your entire lifetime.
With universal life policies (permanent life insurance), you have the ability to adjust or skip your flexible premiums, though that may affect your policy’s life. Learn more about universal life insurance here.
A specified term policy offers much lower risk to the insurer over a 10-30-year plan. The lessened risk allows the policy premium to remain lower. However, when renewing at the end of a more substantial term (30 years), the premium to renew may be significantly higher, making this option less affordable as the policyholder ages.
Cash Value
Permanent life insurance accumulates cash value, which means a portion of your policy earns interest. You may be eligible to take a loan against your cash value to use for emergencies or other situations, as long as your policy has a loan value. Cash values in whole life policies are guaranteed* and typically grow each year.
Term life insurance does not offer the cash value component.
How Does Term Life Insurance Work?
Term life insurance policies are a simple and affordable way to secure large amounts of coverage while, at the same time, protecting those who depend on us financially with lower-cost payments over a set period of years (a term).
For example, when looking for a term coverage of 20 years for a death benefit of $500,000, the insurer will calculate the premium based on the level of coverage, age, gender, occupation, and current health. In addition, insurance companies will often require you to have a medical exam and inquire about your smoking status, medications, and family history. In the event of the policyholder’s death, the chosen beneficiaries would receive the face value of $500,000.
Since term policies are more affordable than permanent life insurance, they are one of the more popular life insurance policies. However, unlike permanent life insurance, term policies do not offer a cash value component and coverage is limited to the length of the term period. Once that term period ends, your coverage also ends; there will be no paid death benefit if the death occurs after the term has expired.
If your term policy has a conversion option for converting to a permanent life policy, and if you have not yet converted your policy to permanent coverage, then you have the option to renew your term policy on an annual basis. Your rate will no longer be locked in, and it will be reassessed each year, which means that your rate will likely increase each year.
When you convert your term policy to permanent protection or purchase another level term policy with BetterLife, you will receive a rate that will be “locked-in” for a period of time. The benefit of converting is that you will not need to go through medical underwriting, meaning you get to claim the same health status that you were at the time you purchased your term life policy. Talk to one of our BetterLife agents to explore which options might fit your needs.
What Should You Know About Term Life Insurance?
How Long is a Term Life Policy?
Most life insurance companies offer term lengths of 10, 20, or 30 years; some also offer 5-year increments or an additional 10 years, up to 40 years. Depending on your current financial situation, the objective of your policy, such as covering your home loan or child’s schooling upon your death, will determine the length of your policy. Policies may also be able to be renewed or converted at some point in the future should you require a more permanent policy like whole life or universal life.
Coverage Amount
The objective of the policy should govern the death benefit received by beneficiaries. For example, for a home loan of $300,000, it would be an obvious choice to purchase a policy covering the total amount of the mortgage.
We created this tool to help you understand how much life insurance you might need.
Most insurance companies offer several different payment options, including monthly, quarterly, semi-annually, and annually. Payments can generally be automatically deducted from your bank account for simplicity and ease.
Premium Payments
The insurer calculates premiums based on many factors. The most common terms are 10, 15, 20, and 30 years. In this form, the premium paid each year remains the same for the duration of the term. This cost is based on the summed cost of each year’s annual renewable term rates, with a time value of money adjustment made by the insurer. Thus, the longer the period of time during which the premium remains level, the higher the premium amount.
For example, the insurance company considers age, gender, smoking status, current medications, medical exam results, coverage size, medical history, family medical history, hobbies, and driving record when calculating your premium. Speak to one of our BetterLife agents to get a quote and explore which option might be best for you.
Medical Exam
Term life policies generally require you to get medical exams and answer health questions – the insurer will assess the amount of risk that may result from certain health conditions and determine your premium price for coverage accordingly. Unfortunately, certain health conditions would render you ineligible to be insured on a term policy. For those who do not qualify for Term life insurance, a Guaranteed Issue policy may work for you. This is a smaller whole life insurance with guaranteed acceptance. This policy does not require a medical exam, family medical history, or other eligibility requirements/evidence. It may be a good option for people with significant health issues.
Death Benefits
The death benefit describes the face value cash amount to be distributed to the policyholder’s beneficiaries in the event of the insured’s death during the policy term.
Face Amount
Face amount is another term to describe the death benefit of the policy.
Beneficiaries
These are the policyholder’s chosen persons to receive the death benefit in the event of the insured’s death. There can be multiple beneficiaries.
Level Term/Level Premiums
BetterLife offers a level term policy with level premiums. A level premium is a fixed monthly, quarterly, semi-annual, or annual payment amount that remains unchanged during the life of the policy.
Group Term Life Insurance
Group coverage life insurance is often used by businesses when looking for a policy to cover multiple persons under a single contract. Companies often use group policies to offer their employees life insurance at a reduced rate.
Can You Cash Out a Term Life Policy?
There is no option to cash out your term life insurance policy. However, BetterLife offers its members a conversion option that guarantees* you’ll be able to purchase coverage as long as premiums are up-to-date and you convert to whole or universal life insurance. You’re eligible for the conversion prior to (1) the end of your initial term or (2) until age 70, whichever comes first!
Under a term policy the death benefit payment is paid to a beneficiary only in the event of the insured’s death during the term. Once the term expires and you stop paying premiums, your policy will lapse (unless you convert your policy to a whole or universal plan prior to the term’s expiration). However, BetterLife’s term policies are annually renewable even after the initial term, but once the term expires, so do your level premiums; therefore, premiums would increase annually thereafter.
How Do Term Life Policies Payout?
If the insured party dies during the term, the policy’s death benefit or “face value” is paid out to the beneficiaries listed on the policy. The beneficiaries may choose how they receive the benefits from several payout options such as lump sum, a retained asset account, or income accounts.
The End of the Term
Is There a Return of Premium?
Once a term life insurance policy expires, there is generally no return of premium or any other reimbursement; if the insured party outlives the term and doesn’t continue to pay their premiums, there is no further benefit. There are exceptions to this rule–some companies offer types of term policies with a return of premium. BetterLife term policy owners can continue to pay their premiums to extend their term, but the premiums will no longer be level.
BetterLife offers its members the opportunity to convert their policy. This provides members with a safety net guaranteeing* that they can purchase life insurance without worrying about passing another medical exam as long as premiums are up-to-date and the policy is converted to whole or universal life insurance. In order to qualify for conversion, the member must convert before the end of the initial term or until age 70, whichever is earlier. Talk to a BetterLife agent today to learn more about our conversion option.
What is the Difference Between Term Life Insurance and Direct Term Life Insurance?
Essentially, a direct term life insurance policy is just a term life policy sold direct-to-consumer by a life insurance company. Term policies are more straightforward than other types of life insurance and don’t necessarily require independent advice.
Can a Term Life Insurance Policy Be Used to Replace the Insured’s Income?
Yes, the beneficiary can use the death benefit as income replacement. The insured party chooses a sufficient coverage amount to cover their family’s financial situation in the event of their death. The beneficiaries may choose how they receive that benefit payout from several payout options. The benefit can be used by the beneficiary for any number of things such as mortgage payments, student loans, funeral costs, or anything else that they may need support with.
Check out our handy tool to determine how much life insurance you may need depending on the factors above.
Choosing the Right Life Insurance Company for You
There are a few key points to consider when choosing the life insurance company that’s right for you.
Life Insurance Quotes – Rates Can Change During the Underwriting and Eligibility Process
When considering your budget during your life insurance search, life insurance premium cost may be one of the more critical factors. However, we suggest you obtain multiple quotes and you don’t rely solely on the quoted amount. Once you go through the underwriting and eligibility process, it’s possible that your original selection may not be as affordable as initially quoted.
When considering various insurance quotes, it’s important to consider not only the premium cost and face amount provided, but also any additional member benefits included with your coverage. BetterLife, for instance, provides not only insurance coverage but also member benefits which provide additional protection and opportunities for you and the people you love.
We recommend talking to one of our experts to explore which option may work for your coverage needs and budget.
Is Term Life Insurance the Same Across All Life Insurance Companies?
The short answer is no…
There are differences between companies that span beyond premiums, term lengths, and death benefits.
Some insurers require more rigorous eligibility criteria to lessen their risk, which allows them to offer lower premiums. This may seem attractive for affordability but can make it more difficult to receive coverage.
Most insurance companies offer periods of 10, 20, and 30 years with others having terms in increments of 5-year periods.
There are many nuances between companies and policies. To ensure you choose a company and coverage that works for your needs, do your research and receive multiple quotes. We recommend discussing your requirements with an expert to ensure you are making an informed decision before making your final choice.
Who Has the Best Term Life Insurance Policy?
There’s no right or wrong answer here. The best term life insurance policy is the one you can afford that also provides sufficient coverage to protect the people you love. All policies come with different terms, coverage, premiums, requirements, and people. When it comes to finding the right company, you will need to do a little research. Our advice is to interview other companies and make sure you connect with them to ensure that they have exactly what you’re looking for.
What Happens If You Don’t Die During Term Life Insurance?
In this case, we would consider this a win!
You may not receive any portion of your premium back or the death benefit value, but you’re alive to see your beneficiaries finish their schooling, pay off their mortgage or other financial debt; you’re one of the lucky ones.
At the end of the initial policy term, your policy may renew each year; in this case, your rates will be assessed based on your age. At BetterLife, you also have the option of converting it into a permanent life insurance plan during the initial term or until age 70, whichever occurs first. This means you can take advantage of guaranteed* coverage and skip some parts of the application process, like underwriting and health exams; this means you could qualify for lower rates than if you were to purchase insurance outright at the same time!
What’s Next?
By now, you probably know the answer to that question. But here’s a quick summary!
- Term life insurance offers a specified amount of coverage called a death benefit. The policy’s value typically ranges from as low as $10,000 to more than $1 million.
- Term lengths can range from 10-40 years depending on what the company you choose offers. You’ll likely choose your term length based on your needs or financial situation.
- Your chosen beneficiaries receive the death benefit in the event of your death during the term.
- During the policy’s life, you pay a premium (usually monthly) to maintain policy eligibility and ensure your death benefit is payable.
- If you outlive the policy, no benefit is received. You may renew or convert your policy if you choose, and your insurer agrees. However, depending on the insurance company you choose, you may be required to repass the eligibility requirements.
Final Word
In this article, we discussed what term life insurance is, the different types of term life insurance, the difference between term life policies and permanent life insurance, how term life insurance works, everything you need to know about term life insurance including common policy terms used, and how to choose an insurance company that fits your needs.
Term life insurance is a great option for anyone who wants to get quality coverage at a lower price. A large number of people turn towards term life insurance because it’s much more cost-effective than other options, and can provide the necessary protection they need.
You might still be unsure if you need life insurance, but we hope after reading this article you are no longer asking yourself, “What is term life insurance?”
Regardless of the many reasons people purchase term life insurance, the team at BetterLife is committed to providing our policyholders and their beneficiaries with compassionate, comprehensive, and affordable term life insurance coverage available. We care about our members individually as we understand that behind every policy, are individuals who have placed a great deal of trust in Betterlife to protect their loved ones after loss.
We all have the desire to protect our family and loved ones from unforeseen circumstances. BetterLife would love to help you protect yours, talk to one of our term life experts today to learn more.
*Guarantees are backed by the financial strength and claims-paying ability of BetterLife.
**Subject to suicide provision.