Term Life Insurance: A Low-Cost Life Insurance Policy Option
80% Overestimate the Price of Term Life Insurance
Need low-cost life insurance? Take a look at the budget friendly option of a term life insurance policy.
Term Life Insurance Defined
Term life insurance is a temporary life insurance solution that provides life insurance at a fixed rate over a specific length of time. Common terms for term life are 5, 10, or 20 years, although other options are possible. The longer the term, the more expensive the policy may become since it covers a longer time span, so the risk of the insured dying during the term will increase. Term life insurance only provides a death benefit and has no cash value.
Life insurance takes into consideration the age at the time of purchasing the policy, so the younger you are when you buy term life, the less expensive it will be.
Why Is Term Life Insurance Less Expensive?
Term life insurance is a less expensive life insurance option and a good choice when you are on a budget because it is temporary and only pays a death benefit to beneficiaries of the policy if the insured dies during the limited term of the policy.
The risk is far less than whole life insurance or universal life policies, and therefore term life insurance is the least expensive option in the life insurance product line. Unlike whole life and universal life products, there are no cash values in the policy, so the premiums are purely for the life insurance death benefit, which also keeps the cost down. Term life is a no frills option that takes care of the basics : providing the money to your dependents in the event of your sudden death. Most people view it as an affordable and immediate life insurance option.
Term Life Insurance May Be More Affordable Than You Think
According to the 2015 Insurance Barometer Study, 80 percent of consumers misjudge the price for term life insurance. Millennials overestimate the cost by 213%, and Gen X overestimate the cost by 119%.
What Happens After Term Life Insurance Expires?
Once the term of the policy expires, you may not be able to purchase a new term life insurance policy at the lower rate you had become accustomed to because the new policy would be based on your age. The older you are the more expensive life insurance becomes.
If you become sick and your term life insurance expires you might have trouble getting a new term live insurance policy.
To avoid problems, consider the idea of adding an endorsement to your term life insurance policy that allows you to convert it to a whole life policy at the end of the term, or get a renewable policy. Your life insurance adviser should review these options with you.
Convertible and Renewable Term Life Insurance
Renewable and convertible term insurance can help you avoid finding yourself in a position where you are uninsured or uninsurable. For example, if you want a 10-year low-cost term life insurance policy and at the end of the term you would like to "convert" to a different term life insurance policy such as a cash-value policy without taking another medical exam, you could choose a level term convertible life insurance policy.
Term Life Insurance and the Contestable Period
Choosing a renewable or convertible life insurance policy may also protect you from the contestable period in life insurance, which allows payment of the death benefit to potentially be investigated and denied during the contestability period. The contestability period usually lasts two years from the date of a new policy. If your intention is to maintain life insurance beyond the initial term, you should ask you agent about this.
Term life insurance does not build cash value or have the tax benefits like universal life insurance or whole life, but it can be a great option for someone who would like life insurance, but can't afford the higher premiums. Here is a check-list to help you decide if a low-cost term life insurance policy is right for you:
- You're on a budget and cannot afford a very high premium.
- You are young and in good health.
- You are looking for a simple, straight-forward, low-cost life insurance plan to protect your beneficiaries.
- You are middle aged and do not require long-term life insurance, but only want to purchase coverage as a result of a temporary situation, or to serve a specific time span.
- You want to supplement your existing life insurance with a secondary policy for a limited time.
Annual Renewable Term Life Insurance vs. Level Premium Term Life Insurance
You can have two different types of term life insurance:
- Annual Renewable Term Life Insurance gives the policyholder term life insurance for a year at a time and renews annually. The premium rises as you age, so buying an annual renewal term policy isn't the choice that most people go with. When thinking about life insurance, you would normally be thinking more than one year at a time. A policy like this would usually be used as part of a greater overall strategy.
- Level Premium Life Insurance gives the policy holder the advantage of a fixed cost over a specified length of time. The annual premium you pay is guaranteed not to change during the course of your policy term, whether it is 5 year, 10, 20 or up to 30 years. With a level premium term life insurance policy you are locking in the rate and will not have any surprises, or rate adjustments while the policy is in effect.
Talking to Your Insurance Agent About a Term Life Insurance Policy
Whenever you are looking at purchasing an insurance policy make sure and let the agent know exactly what you are trying to accomplish, and where you are at in life. Life insurance is part of financial planning and the better your representative understands your current lifestyle and long-term goals, the better the advice they can give you. If you do not feel really comfortable with your representative, find someone else who you feel at ease with.