What Is Term Life Insurance?

When someone else depends on you, it can be natural to wonder what would happen if you weren’t there to support them. Term life insurance can be an inexpensive way to help them financially if the unthinkable happens to you.

Here’s how it works: You pay yearly premiums (you can pay quarterly or monthly too, if you prefer) for a set number of years (the term). If you die during that time frame, your insurance company will pay out a lump sum, also known as the death benefit, to your beneficiaries. If you don’t die, the policy goes away once the term is over — you don’t have to pay your premiums anymore, but your beneficiaries are also no longer going to get a death benefit.

Term life insurance is typically cheaper than the other main type of life insurance: permanent. That’s because permanent life insurance will pay a death benefit no matter when you die, and it accumulates cash value that you can access during your lifetime. Term doesn’t do that.

Term life insurance is typically best to help cover a specific need that will end. For instance, if you have children, you might want enough money to take care of them and pay for things like college or maybe even a wedding someday if you die while they are young. If someone co-signed or could be on the hook for your private student loans, you may want coverage while you’re paying the lenders back so that person won’t be on the hook if you pass away.

TYPES OF TERM INSURANCE

There are two types of term life insurance. The first is level term. As the name suggests, your premium stays the same each year. Level term policies typically last for a certain number of years, like 10 or 20. The second is annually renewable term. These policies are typically offered up to a certain age, like 80. However, you “renew” each year and pay more as you get older.

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An annually renewable term life insurance policy is typically cheaper than a level term policy to start. But as you age, it can become very expensive. Because of this, level term is usually best when you know you won’t need to make changes to your policy in the future. But if you want more flexibility, annually renewable term may be a better option, as it will likely be less expensive up front.

IS IT CONVERTIBLE?

If you don’t want permanent life insurance now but think you might in the future, consider getting a term life insurance policy that can be converted to a permanent policy. That’s because the amount you pay for insurance is based, in part, on your health. When you convert a policy from term to permanent, you don’t have to take another health exam. So if you develop a health condition after you buy your term policy, it won’t be factored into the cost of your permanent policy when you get it later.

Generally speaking, term life insurance can be a great way to get a large amount of temporary coverage for a lower cost. Often, people buy some permanent life insurance and then use term life insurance to increase their coverage. Having a mix of both can give you peace of mind that your family is protected if something should happen to you.