Term life insurance is the simplest and most affordable type of coverage, making it the best fit for the majority of people.
While permanent life insurance might sound appealing, most people don’t actually need coverage that lasts forever.
Instead, most families choose term life insurance, which comes with flexibility, customization, and the best bang-for-your-buck of any type of policy on the market.
In this article:
- What is term life insurance?
- How it works
- Who needs it
- How much it costs
- Term vs permanent life insurance
- How to convert term to permanent
- Bonus tips to save on term life insurance
What Is Term Life Insurance?
Term life insurance is often referred to as pure life insurance because of its simplicity.
It has three basic elements:
- Death benefit
As long as payments are made, the death benefit gets paid out to the policyholder’s beneficiaries if he or she passes away while the policy is active.
How Does Term Life Insurance Work?
Term life insurance is designed to meet temporary financial needs, like replacing income or paying off a mortgage.
Unlike permanent life insurance, it does not come with a cash value savings component, just the death benefit.
If you pass away while the policy is in force, your beneficiaries will receive the full amount of the death benefit, tax-free.
The death benefit and the premiums are usually locked in from day one, but the ins and out of your policy depend on which type you pick:
- Level term: With fixed level premiums and death benefit, your premiums and the amount your loved ones receive won’t ever change. These policies may seem more expensive at the onset but offer the best savings for coverage needs that span more than a few years.
- Decreasing term: The face amount of these policies shrinks alongside your expenses, allowing you to easily pay down debts and only pay for the coverage you need, with level premiums over the life of the policy.
- Annual renewable term: ART policies can be renewed yearly without the need for a new application and medical exam, ideal for short-term needs. While they may be cheaper earlier on, the cost of coverage climbs as you age, making it less affordable in the long run.
- Return of premium: Riders are add-ons you can use to customize your policy. With a return of premium rider added to your term life insurance, you could get the amount you paid in premiums returned to you if you outlive the policy, in exchange for higher rates.
Who Needs Term Life Insurance?
You might benefit from term life insurance if you have the following financial needs:
- Income replacement
- Transferrable debt
- College tuition
- Final expenses
Most of the financial needs above are likely to diminish alongside milestones like graduations and retirement.
Term policies allow you to pick a term to match the timeframe of your financial obligations.
For instance, if you’re just starting out with a new house and toddlers to put through college, a 30-year term policy could provide suitable coverage to meet those needs.
On the other hand, if you’re nearing retirement and have debt that you anticipate will take just a few years to repay, a shorter term length could suffice.
How Much Does Term Life Insurance Cost?
The cost of term life insurance is determined by the following factors:
- Age: With every passing year, premiums climb as your overall risk of mortality increases.
- Health: Your height, weight, blood pressure, cholesterol, and medical conditions factor into your premiums.
- Family health history: If your immediate family has issues with heart disease, diabetes or cancer, it might be challenging to secure a discounted rate.
- Driving record: How safely or recklessly you drive is an indicator of how risky your lifestyle is.
- Occupation: If your job puts you in life-threatening situations, whether you’re a police officer or a commercial fisherman, your rates will be impacted.
- Hobbies: Likewise, high-risk hobbies like skydiving or scuba diving can result in higher rates.
Bottom line: The lower the amount of risk you pose to the life insurance company, the lower premiums you’ll pay.
Additionally, the size of the policy, the duration you choose, and the company you buy it from will be the final determining factors for what you’ll pay.
To provide you with an example, a healthy 35-year-old man might pay around $24 for a 30-year term policy with a face amount of $250,000.
He would pay between 10 to 15 times more for a whole life policy of the same amount.
Term vs Permanent Life Insurance
Term life insurance is the perfect fit for the majority of people, providing affordable protection for just the right amount of time.
Its one potential drawback is that the protection isn’t permanent.
- Estate planning: If you’re a high income earner with a massive estate, permanent life insurance could foot the bill for estate taxes.
- Long-term dependent: If a loved one has special needs that will warrant long term care regardless of when you pass away, a permanent policy can help with the cost.
Aside from the length of coverage, the other key difference between the two types of life insurance is the cash value, a small accessible savings component that can grow over time.
Because permanent life insurance is guaranteed to pay out at some point, it is far more expensive than term life insurance.
The potential cash value growth of a permanent policy isn’t worth the added cost on its own, and should only be a consideration if you’ve maxed out all of your other investment options.
How to Convert Term Life Insurance
If you reach the end of your term policy and realize you still need coverage, whether you incur unexpected debts or gain a long-term dependent, you might want to consider a policy conversion.
Conversion privileges allow you to pay for permanent coverage only when you need it, changing some or all of your term policy to a different policy type, like universal, variable universal or whole life.
Most life insurance providers offer a built-in conversion rider that allows you to convert your policy simply by notifying your insurer you’d like to make the change, free of charge.
Just note that you may be placed in a worse rating class based on your age and health.
Your provider might even offer conversion credit, which could reduce the rates you pay for the first year of permanent coverage.
After that, the difference in what you previously paid for term life insurance and what you pay for permanent coverage will look drastically different.
How to Save on Term Life Insurance
Here are a few ways you can ensure you get the term coverage you need at the lowest cost possible:
Look For Price Breaks
Shopping for life insurance is like buying in bulk at the grocery store. It comes with breaks in pricing when you buy more coverage.
Typical price breaks are at:
- and $1,000,000
In a lot of cases, it is cheaper to round up to the nearest price break than to purchase beneath it.
For example, a $225,000 policy might end up costing more than bumping up to $250,000 because there is more competition at that level.
Pay Annually If You Can
Most life insurance companies offer a small discount, around 3-8% if you pay annually as opposed to monthly.
If you have 10 to 30 years of payments to make, those savings can add up quickly.
Some companies allow payment via credit cards, so you may even be able to pick up rewards points on your payments.
As a bonus, annual payments can be simpler to keep up with, lessening the chances of a missed payment and policy lapse.
If your situation warrants it, buying more than one life insurance policy at various term lengths and amounts could save you money in premiums in the long run.
Laddering is a strategy that takes advantage of the flexibility of different types and lengths of life insurance policies, applying the various policies to different financial obligations.
Having a 10-year policy to replace income for your family with a separate 30-year policy to cover your mortgage is a great example.
Use Workplace Policies the Right Way
Most employer-based term policies are offered on a simplified or guaranteed basis, with no medical exam and limited or no health questions to answer.
Simplified underwriting comes with higher premiums and lower face amounts, though, meaning they should be used as supplemental coverage rather than your main source of life insurance.
If your employer is paying the premium, and it’s not payroll deducted, then you should always take as much coverage as you can get.
If not, be sure to understand the terms of the policy, like its portability, before opting for coverage and compare it to the cost of private insurance to ensure you’re getting a good deal.
Ask About Reconsiderations
If you don’t get the rating you hoped for after applying for coverage, you may be able to ask for a reconsideration from the issuer.
As often as annually, you can contact your provider with an update on your health and ask them to reconsider your premium.
This is a solid option for individuals who lose weight after receiving a rating based on their BMI, have stopped smoking, have had a successful transplant, or made any number of health-related improvements.
There’s no harm in asking for a reconsideration, and there’s a chance it could save you money on premiums.