With so many controversies concerning buying term life insurance, I wanted to present a few ideas for you to ponder and decide for yourself. Some are saying term life is a waste of money while others argue you should buy term and invest the difference.
I believe that there is no one policy that will fit every individual. We all have different needs, incomes, family sizes, and health histories to consider when acquiring a life insurance policy. To help work it out, let’s look at the advantages and disadvantages of term life insurance.
What Is Term Life Insurance?
As the name implies, term life insurance provides coverage for a specific time frame and pays a benefit only if you die suddenly during that particular term. Your beneficiaries will receive a set payment (known as the death benefit) as described in your policy. Term periods typically range from 5 to 30 years with 20 years being the most popular term.
This type of insurance can also be referred to as “pure life insurance” since it has no savings component or any other added benefits. In short, it provides a guaranteed death benefit for a given period.
Related: Sample term life insurance rates.
What Happens When the Term Is Over?
When your term life insurance expires, you have 4 choices:
- Drop the policy – You no longer need it; you bought it 30 years ago, your house is paid off, the kids are married now and are not depending on your income anymore, and you saved enough money to support your wife or your final expense if needed. You should rejoice that you never needed to use it and you are still alive. It provided the certainty you needed for your heirs should something have happened to you.
- Extend your coverage – Most term life insurance doesn’t really expire at the end of your term. Most policies expire when the insured reaches 95 years old. You may continue with your current policy without taking an exam or proving insurability; however, it will be significantly more expensive, and the rate will increase every year as you age. It will renew on an annual basis. Some families are opting for that choice because they may need the coverage for 2–3 years (the insured has a terminal illness) so that they can collect the death benefit; however, most individuals do not opt for that choice. If you are healthy and need a policy, just get a new term or a final expense policy.
- Convert your policy – Most life insurance policies offer this choice. You may convert your policy into a Whole Life or Universal Life, though this will highly depend on if they are offering that product when your term expires. Keep in mind that this must be done before your term is over and typically before the age of 70. Just like extending your coverage, you don’t need to go through an exam or prove insurability. This is a good choice for people who still need life insurance but aren’t in the best of health, so either buying a new policy at a later age will cost too much or they could not be accepted.
- Buy a new term policy – For some, this may be the best choice. If you are still relatively healthy under the age of 60 years and don’t want to pay for a whole life policy, this will be the best choice for you. You can also get a no-exam policy if you choose this route, but keep in mind that you will pay more for that, and the max death benefit is usually $500,000.
Advantages of Term Life Insurance
One of the primary benefits of term insurance is its lower initial cost when compared to permanent insurance. The reason it’s cheaper is that, with a term policy, you’re typically just paying for the death benefit, the payment your beneficiaries will receive if you pass away during the term of the policy. With most permanent policies, your rates help fund the death benefit and can build up cash value.
Term insurance is usually a sensible choice for people who are building a family, especially if they’re on a tight budget since it allows them to purchase higher levels of coverage when the need for protection is often greatest.
It’s a good option for addressing requirements that will disappear in time. As an example, if paying for school is a significant financial concern, but you’re confident that you won’t require insurance coverage after the children graduate, then it might make sense to purchase term coverage that’ll get you through the school years. If you are healthy and looking for a fast underwriting decision, you may want to apply for a no-exam term policy.
Since most term life policies offer the conversion benefit, it may appeal to you to buy term because it’s the lowest price right now, and you can convert it later if you choose or need to. So you aren’t really committing to any long-term policy such as whole life, but you keep the doors open for future needs.
Term coverage is the simplest form of life insurance to understand. We all value something that is simple to understand. For instance, if you bought a 30-year policy when you were 30 years old, you should know it will expire at the age of 60.
Disadvantages of Term Life Insurance
The specific restricted time frame that term life offers may be an issue for some. You can buy a $500,000 30-year term policy if you are in your 30s, but, if you wait to buy it when you 65 years old, you may get a 20-year policy. The term length is highly related to your current age at the time of the application.
It’s like renting a house or an apartment; there is no cash value to the policy after paying for 20 or 30 years. Many will argue that they can save or invest for themselves and are happy to get rid of it after 30 years.
If you should develop some health issues that would keep you from getting new insurance, you will be stuck with the high premiums to pay at the end of the term should you decide to keep it.
The conversion built into many term plans is only allowing you to convert it with the company where you first bought the term policy. So, if you develop any health history, you are at the mercy of the product and services of the same company.
If they don’t have a good permanent product, this is your only choice. It may have been the best term product 30 years ago, but now, at the age of 60, they only offer GUL as a permanent product, and this is your only choice.
What Can Term Life Insurance Be Used For?
- Ensure your children are left with funds to help pay for school.
- Provide required protection as per a divorce agreement.
- Help your family take care of your final expenses and medical bills.
- Leave your family with sufficient funds to pay off debts such as a mortgage.
- Can be used by businesses for key person insurance or buy/sell agreements.
- Provide short-term insurance coverage if you’re between jobs.
- Replace your income if you are to pass away unexpectedly.
Term life insurance is probably the most popular form of protection because of its lowest cost. Whether you buy whole life or term insurance, you will still need to be in great health to get the lowest rates.
So, it’s not necessarily the type of plan that you buy but the risk you pose to the insurance carrier that ultimately determines your rates. You can go ahead and run term life insurance rates on this page, or give us a call at 866-326-3053 for a quote personalized to your distinct health and need.