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If a permanent life insurance policy is beyond your financial reach, a term life insurance policy may be a viable alternative.
Term life insurance provides life insurance for a specific period of time, typically 5, 10, 20 or even 30 years. It provides the most life insurance protection for the least cost and helps those who can’t afford to buy a permanent life insurance policy to provide financial protection for their families.
If you are the main source of income in your family, or have children, and can’t afford or don’t want to purchase a regular life insurance policy, then a term life insurance policy might be a good option for you.
How does term life insurance work?
Like a permanent life insurance policy, term life insurance pays out an agreed-upon amount of money to your named beneficiaries should you die during the time you are covered by your policy. However, there is no payout if you should die after your policy has expired or if you’re lucky enough to survive the length of your policy (although, to cover this possibility you can purchase protection, called Return of Premium Life Insurance, to receive a return of all paid premiums).
Many young families purchase term life insurance to provide protection during child-raising years, or to provide extra insurance protection to help pay off loans.
Types of term life insurance
There are two kinds of term life insurance: straight term or decreasing term.
Straight term (also known as level term) insurance provides you with the same amount of insurance as long as the policy is in effect. With this type of insurance, your premium levels also remain the same for the length of your policy’s term.
With decreasing term insurance, the amount of insurance included with your policy decreases over time, but your premiums stay the same. Those who expect their insurance needs to decline over time—for instance, as children age or as a mortgage loan decreases—typically find this type of policy attractive as it is the most affordable.
Advantages of term life insurance
Affordability. Term life insurance can be substantially cheaper than a regular life insurance policy because of its temporary nature.
Renewability. Many term life insurance policies provide you with the ability to renew your protection. When you renew, the amount of coverage you have will remain the same, but your premiums will increase at each renewal.
Convertibility. Many term life insurance policies also offer the ability to convert your term policy to a permanent life insurance policy (typically for an equal or lesser amount of coverage). There usually are maximum age limits for converting your policy, but a major benefit of doing so is the ability to skip the medical exam that is needed for purchasing permanent life insurance.
How to purchase term life insurance
As with any long-term purchase, it pays to shop around. Find a qualified insurance agent who can provide you with quotes and options for multiple insurance companies. When selecting a policy, be sure to evaluate how well it meets your needs along with how much it costs. And be sure that the company you ultimately select is on good financial footing by checking their ratings at A.M. Best or Moody’s.
This article contains general information. Individual financial situations are unique; please, consult your financial advisor or insurance agent before utilizing any of the information contained in this article.
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