Term Life Insurance
Term life insurance, also known as pure life insurance, guarantees payment of a death benefit to your family if you pass away during a specified time. Because these policies are less expensive than permanent life insurance, they can be used as a retirement savings tool.
What Is Term Life Insurance?
Term life insurance policies are only in effect for a certain period of time.
If you pass away when the policy is in effect, the insurance company pays a death benefit to your beneficiary.
Common terms last 10, 20 or 30 years.
Several factors influence your monthly premiums, or how much you pay for coverage each month.
- The policy’s value (payout amount)
- Length of term coverage
- Your age
- Your gender
- Your health
Term life insurance policies are generally more affordable than permanent life insurance because term life only covers a set amount of time. Permanent life coverage never expires.
Permanent life policies are also pricier because part of your premium is placed in a separate savings or investment account.
Term life policies, in contrast, do not build a cash value.
Types of Term Life Insurance
The market for term life insurance is very competitive. Companies offer different policy varieties and features to satisfy the needs of many customers.
Level Term or Level-Premium Policies
Under a level term policy, the face amount of the policy — or the money paid out to your beneficiaries when you pass away — remains the same for the entire term.
Yearly Renewable Term Policies
Renewable term policies allow you to renew for another period after the term ends — regardless of your health.
This is important because your health may decline over time, making it difficult or even impossible to obtain a policy at the same rate once your original term expires.
Keep in mind that your premiums increase with each new term.
Decreasing Term Policies
With decreasing term policies, the face amount reduces over time.
Premiums often stay the same each year but can be lower later in the contract term.
These policies are often sold as a kind of mortgage protection. The insurance decreases as the balance of the mortgage decreases.
If you still have mortgage payments when you die, this type of policy is used to pay off the rest of those payments.
What If Your Term Life Policy Expires?
If your term life policy expires, you have a few options.
You can renew the policy for another term, convert it to permanent coverage or terminate it.
If your current term has expired, you may not need new coverage. Some people only need life insurance for a certain time, such as when they’re paying off debt or caring for dependents.
But if you still need coverage, it’s best to have a conversation with your insurer or broker at least six months before your policy expires.
You can purchase additional coverage by converting your current term policy to a permanent policy. Doing this is cheaper than taking out an entirely new permanent policy.
However, converting a term policy to a permanent policy will still cost much more than your current term life insurance. Also, you can’t convert your policy after it has already expired.
If you’re still relatively young and healthy, you may be able to simply renew your term policy. This may be cheaper than converting your term life insurance to a permanent policy.
Term Life and Retirement
Term life insurance may expire long before you retire. But these policies can still play an important role in retirement planning.
Because term life offers lower costs, it frees up money you can invest in an employer-sponsored 401(k) plan, Individual Retirement Account (IRA) or other retirement savings vehicle.
Purchasing term life insurance is a smart move — especially for young people, according to Charles Weeks, a financial planner and assistant professor of finance at Stockton University.
“Term insurance is the best option for most people,” Weeks wrote in a May 2020 Business Insider article. “It is inexpensive, it can be aligned with the exact timeframe it is needed for, and most importantly, it allows any additional money not being spent on premiums to be invested for other financial goals.”
Term life also helps protect your spouse’s retirement. If you die young, your spouse will still be able to cover living expenses and care for dependents without plunging into debt — or working well past retirement.
5 Cited Research Articles
- Weeks, C. (2020, May 2). A financial planner explains how to choose the right life insurance policy. Retrieved from https://www.businessinsider.com/personal-finance/how-to-choose-a-life-insurance-policy-financial-planner-advice
- Danise, A. (2020, March 18). Types Of Life Insurance Policies. Retrieved from https://www.forbes.com/advisor/life-insurance/types/
- National Association of Insurance Commissioners. (2019, October 4). Life Insurance. Retrieved from https://content.naic.org/consumer/life-insurance.htm
- New York Department of Financial Services. (n.d.). Types Of Life Insurance Policies. Retrieved from https://www.dfs.ny.gov/consumers/life_insurance/types_of_policies
- AIG Direct. (n.d.). Life Insurance Rates By Age. Retrieved from https://www.aigdirect.com/about-life/planning-for-life-insurance/life-insurance-rates-by-age