Term life insurance provides a cash death benefit at a fixed cost for a specific period of time, usually 5, 10, 15, 20 or 30 years. It is the least expensive way to purchase life insurance coverage. Compared to traditional whole it can provide for a much larger benefit for less 1/10th the cost.
Some, but not all term life insurance plans may offer an option to convert the plan to a more permanent plan such as whole life or universal life.
Term Life Insurance
Term life insurance is an affordable life insurance solution. This kind of plan is helpful for those concerned about providing for their families or dependents after they pass away, but who may not want to invest in a permanent, long term plan.
The cost for term insurance is less expensive than permanent policies, as it offers no cash value benefits. The premium for coverage is paid each year, and will cover the risk of death benefits for that time period. In the event that the policy holder does pass away, beneficiaries receive the death benefits, tax-free. Term life insurance comes in several policy types as outlined below:
Level Term Life Insurance
This is the most common type of term life insurance because it provides great value, at a low cost. The policy provides a set premium for the length of a term, which can vary from 5 years, to 10, 15, 20, and up to 30. These types of plans often offer the policy holder options when the term ends which include: converting the plan into a permanent one extending out the term.
This kind of plan is very beneficial, as it provides a longer term coverage plan, at an affordable price. One thing to look out for when signing a policy is the guarantee that the rate will stay the same throughout the whole term.
Return of Premium Life Insurance Policies
This is a unique type of term life insurance policy, which will refund all premium payments if the policy holder lives past the designated term. The policy will provide the death benefit to beneficiaries if the policy holder does pass away, however if they make it to the term, the full amount gets refunded tax free.
It is a plan to invest for the future, while also securing the future for any dependents in the case that something does happen. On average, this type of plan does have a higher cost by about 35% when compared with other plans. However, those additional costs are potential savings for the future. It is important to note that keeping funds in the account for the duration of the term is recommended, as if funds are removed early, the refund will be slim to none. This plan is one you can bet your life on!
Annual Renewable Term Life Insurance
This type of plan is renewable on a yearly basis. It is convenient because the plan does not require any proof to be insured in order to renew the plan, until reaching a designated age. This kind of plan can be helpful when a person has unreliable income and needs a plan to hold them over until the next year. Due to the fact that the risk of dying within a 1-year term is relatively low, premiums on these plans are often very affordable.
As a general rule in the life insurance industry, as a person ages, the cost for coverage is going to go up. While costs, can be affordable for a 5-year term at the age of 25, it can be a different story at the age of 40 with pre-existing health conditions. For this reason, it is beneficial in the long run to look for a term insurance plan with good premiums and options for the future.