Term Life Insurance: Definition, Types, Benefits, and Drawbacks

One common sort of life insurance is term life insurance, commonly referred to as pure life insurance; it is easy to understand, reasonably priced, and lasts however long you require. You can pay the premiums monthly or annually, and when you pass away, your dependents will get a lump sum payment that is tax-free. It is a kind of death benefit that provides money to the policyholder’s heirs over time.

After the term expires, the policyholder has three choices: they can convert their term life insurance policy to permanent insurance, renew it for an additional term, or let it lapse.

How Does Term Life Insurance Work

Term life insurance is easier to manage and more affordable than permanent life insurance, which has a cash value and insures you for the rest of your life. Your age, gender, health, and the policy’s value (the total amount of payments) are all factors taken into account by the insurance company when calculating the premium for term life insurance.

Your driver’s license, medical records, smoking status, list of interests, place of employment, and family history may be requested by the insurance company. So that you don’t pay for more financial protection than you need, you can choose the term duration and coverage amount.

If you pass away within the policy period, the insurer will pay the face amount of the insurance to your beneficiaries. Beneficiaries may utilize this financial assistance to cover your funeral and medical expenses, consumer debt, or mortgage debt, among other things. It is generally not taxed.

Term Life Insurance Vs. Whole Life Insurance

Most insurance buyers will want to choose between purchasing term or whole life insurance. Term life policies have no significance other than the assured death benefit. There is no savings component as is found in a whole life insurance product.

Term life is the less expensive life insurance option because it provides only a death benefit and the benefit has restricted time. Whole life costs five to 15 times more than term life for similar coverage amounts. That’s because whole life lasts longer and has an extra savings feature called the cash value. Purchasing a whole life equivalent would have substantially higher premiums, perhaps $200 to $300 per month or more, depending on the provider.

The majority of term life insurance contracts end without disbursing a death payment. When compared to a permanent life insurance policy, this reduces the insurer’s overall risk. Because of the lesser risk, insurers can set cheaper premiums.

Term Life Insurance vs. Convertible Term Life Insurance

Life insurance policies take two basic states, either term insurance or permanent life insurance. One of these variations is convertible term life insurance, which lets you convert your term insurance policy to a permanent life policy without a medical exam or health assessment.

The conversion rider ought to give you unrestricted conversion to any permanent policy that the insurance provider provides.

The main characteristics of the rider are choosing when and how much of the coverage to convert, as well as keeping the term policy’s initial health rating upon conversion, even if you later develop health problems or lose your ability to be insured. Your age at conversion serves as the foundation for the new permanent policy’s premium.