What is term insurance?
Really good question! Term is a type of life insurance that provides a potential death benefit for a fixed period or "term." This is commonly a flat premium for say, 5, 10, 15, 20, or 30 years. After the end of the term the policy no longer provides a death benefit. The other common characteristic of term life is there is generally no cash accumulation, which helps keep the cost relatively low. Term is often characterized as temporary insurance. (There is also annual renewable term "ART" where premium increases each year--that is not popular with consumers, and is usually found as part of an employee benefit plan.) I hope that answer helps!
Think of Term Insurance and Life Insurance that covers for you for a specific amount of time. For example, you have a large 30 year mortgage. You may want to get life insurance to make sure your significant other and kids are okay if something were to happen to you. You would get life insurance to cover the “term” of the mortgage.
There is a myth that term life insurance is cheaper than other options. While true “term” may cost less in the short term, it will cost more in the long term (assuming you don’t die right away), and actually very few term policies ever pay out. The insurance companies can make them so cheap in the short term because they expect that very few people will pass away before they abandon coverage.
Think of it as cost versus value- you pay less, but if all goes well, you will be alive, but get nothing back from your premiums paid in over the years.
All the best,
Term insurance is the cheapest way to get a guaranteed life insurance benefit for a defined amount of time. It has two design features which make it attractive this way:
1. A contractual guarantee on both the premium and the survivor benefit for a defined amount of years (10-15-20-25-or 30 years, depending on the company, the age of the insured, and other factors).
2. No capability of accumulating cash inside the policy. You can't pay an extra premium to get extra benefit; you can’t transfer money from other accounts into the policy, and the carrier will not pay dividends or apply interest to your account.
This product is ideal for covering yourself for a single need, for a specific amount of time. These could include indemnifying a mortgage or business loan, meeting the obligations of a divorce decree, or bridging the gap until life insurance is no longer necessary. The kicker, of course, is that if you outlive this time, and still for whatever reason need coverage, then term insurance could become extremely costly. The price typically increases astronomically after the guarantee period.
If you are considering buying term, give some thought as to whether you still might need coverage longer than you anticipate. If so, then you might want to go with a permanent product and lock into rates for the long term.
Feel free to contact me with additional questions.
Generally there are two types of insurance, Term and Permanent.
Term is coverage for a specific period time (such as 1, 5, 10, 20 or 30 years). It is usually just pure insurance, meaning there is usually no cash value build up/ benefit inside the policy, just a death benefit. There are many variations and time limits on policies, but I like to think of term insurance as for a specific reason with a defined time line, ensure payoff of mortgage, funding education, debt payoff, budget restrictions, lump sum for a purpose. etc.
Depending on the amount of coverage, you will most likely be required to take a physical/medical exam, the insurance company will possibly request your medical records from your physician(s)/ health providers and undergo an underwriting process by the insurance company. Once approved your coverage will be in effect as long as you pay your premium until the policy term expires.
Term is normally less costly than permanent insurance. I also suggest shopping insurance companies since costs can vary between companies.
Term life insurance covers you for a specific period of time. For example, let's say you have a mortgage that you are going to be paying for the next 30 years, it may be a good idea to purchase a term life insurance policy to cover the amount of the mortgage for the 30 years.
The advantage to term life is that the premiums for term life policies are much less expensive than their permanent life insurance counterparts. This can definitely help you save money over the long-term, but it really depends on your view of what life insurance should be used for. Most term policies don't pay out during the period of insurance, so the real point of a term life insurance policy is really just to cover you for a specific amount of time in case you were to pass away with the understanding that when that term is over, the need will probably pass for you to have insurance as well. A good example of this would be that at the end of your 30-year mortgage, if you've been able to pay off your home then it wouldn't make sense to pay a monthly premium to protect you for the amount of the mortgage that's already paid. In this case, you just don't renew the term policy and you won't have to make any more payments.
The disadvantage to a term policy is that since most term policies don't pay out during their term, a death benefit will only be there during the actual term. In the above example, when your 30-year mortgage runs out, if you decide that you want to continue coverage, you will have to renew and prove to the insurance company once again that you are medically qualified to be able to be covered. This could include a full medical exam and if you are in worse health than you were when you first qualified for your original term policy, you may not even be able to qualify for life insurance policy at all at that point.
For those that need coverage over a specific period of time, a term life insurance policy can be a very good option to protect your nest egg and in most cases, the premiums are affordable and quite a bit less expensive than a permanent policy such as a whole life or a universal life.
President of Brein Wealth Management, LLC in Bellevue, WA
Investment Advisory Services offered through Brein Wealth Management, LLC, a registered investment advisor in the state of WA. Investopedia, LLC & Brein Wealth Management, LLC are not affiliated companies.