Because of its affordability, term life insurance is a popular form of life insurance coverage. Unlike permanent coverage, it isn’t designed to last a lifetime and it doesn’t build a cash value. Instead, it lasts for a set number of years, such as five, 10, 20, or 30. Once that term has expired, so does the death benefit protection.
For this reason, term insurance can be a great choice if you need temporary coverage, such as while you’re raising a family. However, term insurance would be a poor choice if you require lifetime coverage, perhaps because you have dependents with special needs. Here is a breakdown of the basic types of term life insurance coverage to help you decide if this is the right choice for you.
Level Term Policy
A level term policy is the “standard” type of life insurance policy, in which both the policy premiums and the death benefit remain constant (or level), until the end of the term. You might consider this policy if you are a young breadwinner with small children. Parents typically need a substantial amount of death benefit protection, at least until their children are through college. Level term insurance can get you that protection at a reasonable cost.
For example, if you are a 30-year-old in good health, you might pay $23 per month for a $500,000 20-year level term policy. But for a whole life policy (a type of permanent life insurance), you could pay $475 per month for the same death benefit. A term policy will be thousands of dollars cheaper than any type of permanent protection in most cases.
However, the cost of life insurance can become prohibitively expensive as you age. Plus, if you want to continue coverage once a term expires, you have to reapply. Any health issues you developed since the first time you applied will also increase the cost—or even make you uninsurable. For example, if you are a 65-year-old overweight man with minor health issues, you could pay over $700 per month for a $500,000 term policy that expires when you’re 85.
Many term life insurance policies are limited by the age of the applicant. For example, if you are 75 or 80, you may only be able to get an insurance policy for a 10-year term. These limits vary by insurer, but common limits for seniors are:
- 75-80 years old: 10-year term policy
- 70-75 years old: 15-year term policy
- 60-70 years old: 20-year term policy
- 50-60 years old: 30-year term policy
While it is much cheaper for younger people, term insurance can be unaffordable in your later years, and health issues could make you ineligible for coverage.
Renewable term coverage guarantees that you can renew coverage (frequently, for a year at a time) after the term on your policy has expired without the need to requalify or reapply once the term ends. This makes renewable term coverage an option if you develop health issues that would otherwise prevent you from continuing coverage with a new policy. This type of coverage is also known as guaranteed renewable term coverage.
However, if you exercise the renewability clause, your new rate will be higher, because it is based on your current age. The rate will continue to increase every time you renew coverage thereafter (which could be annually).
You may be able to secure renewable term coverage with or without other features (below) on term insurance policies.
This is an option on many term insurance policies, and some include it as a standard feature. Convertible term coverage is so named because you can convert term insurance into permanent coverage without needing to provide evidence of insurability (like taking a health exam or answering medical questions).
Convertible term coverage can be a good choice if you might like to have permanent coverage but can’t currently afford it. Conversion may only be an option during a specific window of time once the policy is issued, such as the first 10 years. If your policy has this feature, or you’re interested in purchasing a policy with it, make sure you understand the terms and conditions under which you can convert.
If you convert the full death benefit of a term policy to permanent coverage, your premium will be higher. This is because permanent insurance is more expensive than term insurance, and the premium will be based on your age when you convert.
Credit term is a life insurance policy designed to pay off a specific debt, such as a credit card or mortgage, if you die before paying it back. The beneficiary is usually the lender. Most types of credit life insurance are decreasing term policies (meaning the death benefit reduces at regular intervals). This is because the principal amount of the debt usually decreases over time as you pay it off in monthly installments.
One of the key advantages of credit term life insurance policies is that most of them do not require underwriting. That is, you don’t have to take a medical exam or answer medical questions to qualify. This can make a credit term policy a good choice if you have debt, are in poor health, and cannot get any other type of coverage.
But this freedom from underwriting comes at a cost: Credit term life insurance is expensive. But it may still be better than nothing if you are a homeowner or credit card user who cannot medically qualify for more standard types of term coverage.
With decreasing term life insurance, your premiums remain level throughout the term of the policy, but the death benefit steadily decreases over time. This type of term coverage is cheaper than level premium policies because of the shrinking death benefit.
Like credit term life insurance, decreasing term policies can be a good choice when you want to cover a decreasing debt, such as a mortgage. However, you typically need to go through some level of underwriting, which makes these policies generally more affordable than credit term life insurance. Plus, you can—and often should—choose a beneficiary other than the lender.
Group term life insurance is most often available through your employer and may be the cheapest form of term coverage, especially if your employer covers a portion (or all) of the premium. You don’t typically need to prove that you’re insurable to get coverage. Plus, the IRS considers the dollar amount of premiums for the first $50,000 of group coverage to be a tax-free fringe benefit.
Employees who seek a large amount of non-permanent death benefit protection should probably look to their group benefits first because of the low cost and generous underwriting requirements (if any). The only real limitation is that you cannot get a group term policy without belonging to a group or organization that offers it (such as an employer or fraternal organization).
Return of Premium Term
A return of premium term policy is a type of level term life insurance that costs more than a standard level term policy. However, It also repays the insured for the cost of some or all of the premiums that are paid into the policy. This means you can receive a lump-sum payment of your accumulated premiums once the term expires.
Some financial planners argue that if you buy traditional term insurance and invest the difference in an IRA, you will come out ahead of someone who buys a return of premium policy. But the return of your money is guaranteed with this type of policy, whereas there may be no guarantees from the investments you choose.
Permanent policies build a cash value that you can access via withdrawals and loans. Plus, if you cancel a permanent policy after its surrender period, you could potentially recover the amount of premiums you paid into it.
Adjustable Premium Term
In most term policies, the insurer can’t change the premium at its discretion once the policy has been issued. By contrast, an adjustable premium term policy allows the insurance company to offer you a lower premium initially with the right to increase it later during the policy’s term. However, the insurance company cannot raise your rate above the maximum amount of premium stated in the policy.
Child Term Rider
A child term rider is an optional feature you can purchase on many term or permanent policies. This rider will pay you a certain amount of death benefit if your child (or children) dies. No underwriting is required. Child term riders are usually cheaper than buying a separate policy for each child and may be convertible to a permanent policy once your child reaches a certain age, such as 25.
- There are a range of term life insurance policies available to suit different coverage needs.
- Term life insurance expires after a certain number of years unless it has a renewability clause or a conversion clause.
- Some forms of term coverage do not require underwriting, such as group term and credit term policies.
- A child term rider is an affordable way to add coverage for your children to an existing policy. It can be converted to permanent coverage once your child becomes an adult.