Term Life Insurance 101: Understanding Your Options

Term life insurance is a type of insurance that provides coverage for a specific period of time, usually 10, 20, or 30 years.

You have a choice between two main types of term life insurance: level term and decreasing term. Level term insurance provides a fixed death benefit, while decreasing term insurance pays out a decreasing amount over the term of the policy.

The term of the policy is usually chosen based on your life expectancy and financial obligations, such as paying off a mortgage or raising a family.

Most term life insurance policies have a fixed premium, which can be paid monthly or annually.

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The insurance company determines your premium based on the policy's value, age, gender, and health. They'll also consider their business expenses and how much they earn from investments.

A medical exam may be required, and the company will ask about your driving record, current medications, smoking status, occupation, hobbies, and family history.

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The policy's face value will be paid to your beneficiaries if you die during the policy term. This cash benefit is not typically taxable and can be used to settle your healthcare and funeral costs, consumer debt, and mortgage debt.

However, your beneficiaries aren't required to use the insurance proceeds to settle your debts. You can renew a term policy at expiration, but the premiums will be recalculated based on your age at the time of renewal.

Term life insurance is often the most affordable option, with premiums ranging from $8 to $67 per month, depending on your age and health.

For a 30-year-old non-smoking man, a $250,000 term life insurance policy can cost around $18 per month. However, this premium can increase significantly with age, reaching $67 per month by the time you're 50.

The cost of term life insurance depends on several factors, including your age, health, and gender. Younger people qualify for lower premiums because they are less likely to die in the near term. Men typically pay more for life insurance than women due to their shorter life expectancy.

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Term life insurance premiums can be unpredictable, but most policies have fixed premiums and payouts throughout the term. This means you'll know exactly how much you're paying each month and what your loved ones will receive if you pass away.

Here's a breakdown of the average annual cost of term life insurance for nonsmokers:

These rates reflect premiums paid monthly for one year and are based on data from Quotacy, valid as of March 20, 2024.

There are several types of term life insurance to choose from, each with its own set of characteristics. Most companies offer terms ranging from 10 to 30 years, although a few offer 35- and 40-year terms.

One popular type of term life insurance is level-premium term life, where your premiums stay the same every year. This is the right choice for many people, and 20-year policies are the most popular.

Another option is renewable term life, which gives you the option to renew your coverage after the term expires. This can be a good choice for those with a brief life insurance need, such as covering a short-term loan. However, your premiums may increase when you renew.

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Decreasing term life policies have a life insurance death benefit that goes down over time, though premiums usually stay the same. This type of policy is often used for mortgage protection insurance, where the death benefit decreases as the mortgage is paid off.

Here are some common types of term life policies:

Level-premium term life is a common and popular choice for many people, where premiums stay the same every year.

Most level-premium term life policies provide coverage for a period ranging from 10 to 30 years, with a fixed death benefit.

20-year policies are the most popular type of level-premium term life insurance, according to the Insurance Information Institute.

Renewable term life gives you the option to renew your coverage after the term expires, even if your health would otherwise prevent you from buying a new policy.

However, your premiums may increase when you renew, making it suitable for those with a brief life insurance need.

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Annual renewable term is an example of this type of coverage, often used to cover a short-term loan.

Decreasing term life policies have a life insurance death benefit that goes down over time, though premiums usually stay the same.

Yearly renewable term (YRT) policies are one-year policies that can be renewed each year without providing evidence of insurability.

These policies can become prohibitively expensive as the policyholder ages, making them a good option for someone who needs temporary insurance.

Here are the main types of term life insurance policies:

Decreasing term policies are often used in conjunction with a mortgage, with the policyholder matching the insurance payout to the declining principal of the home loan.

Convertible policies offer a lot of flexibility and peace of mind. They include a conversion rider that allows you to switch to a permanent policy without going through underwriting or proving insurability.

The conversion rider guarantees your right to convert the term policy to a permanent plan, and you can choose to convert to any permanent policy the insurance company offers without restrictions.

For another approach, see: Life Insurance Term Conversion

This means maintaining your original health rating, even if you develop health issues later on, and deciding when and how much of the coverage to convert.

The premium for the new permanent policy is based on your age at conversion, which means overall premiums will increase significantly since whole life insurance is more expensive than term life insurance.

A guaranteed approval without a medical exam is a significant advantage, and medical conditions that develop during the term life period won't cause premiums to increase.

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Term life insurance is a great option for young people with children, offering substantial coverage at a low cost. This coverage can replace lost income if the insured dies while the policy is in effect.

Parents can maintain the coverage needed until their children reach adulthood and become self-sufficient. The term life benefit may also be useful to an older surviving spouse.

Term life insurance premiums are based on a person's age, health, and life expectancy. This means that younger people will pay lower premiums than older people.

Here are some common term life insurance policy lengths:

These policies are typically renewable for an additional term, giving you flexibility if your needs change over time.

You might be wondering who needs term life insurance. The answer is, it depends on your financial situation and goals. If you have dependents, such as a spouse or children, you might need term life insurance to ensure they're taken care of if you pass away.

Term life insurance can help pay off outstanding debts, like a mortgage or car loan, so your loved ones aren't left with the burden. According to our previous discussion, a typical policy can cover up to 10 times your annual income.

If you're young and single, you might not see the need for term life insurance. However, if you're planning to start a family or get married, it's a good idea to consider getting a policy. This can provide peace of mind for you and your partner.

Comparing prices is a crucial step in finding the right term life insurance policy for you. You'll want to get quotes from a handful of insurers to ensure you're locking in the lowest possible rate.

Every insurer has its own criteria for setting rates, so premiums can vary significantly. This means you'll need to do your research to find the best deal.

It's easy to compare life insurance quotes online for term policies. You can even choose the same coverage amounts and options for each policy you compare to make the process smoother.