Term life insurance is a budget-friendly solution to those who seek financial protection during life’s crucial moments. By circumventing the cash value component of permanent life insurance, term life insurance provides a straightforward form of coverage that is intended to last for a set period of time. Whether you’re dealing with the child-rearing years or addressing mortgage payments, term life can be a helpful safety net. The insurance team of Bankrate breaks down the term life insurance policy to clarify if it is appropriate for you.
What is the meaning of term life insurance?
Term life insurance is a form of life insurance that has a predetermined number of years instead of the entire life. When purchasing a term life insurance policy, you will choose a term that is typically between 10 and 30 years.
To clarify the manner in which term life insurance functions, imagine you buy a 10-year term insurance policy. During the decade, you would pay your monthly or annual subscription fee on time. If you died during the given timeframe, your beneficiaries would receive the policy’s deceased benefit.
If the insured does not perish within the policy’s term and the coverage is up, the policy would end and the beneficiaries would not receive a benefit for death if the insured perishes. However, there are exceptions to the scenario. Many of the most popular life insurance companies specialize in providing riders that alter the way that term insurance is typically employed. If you’re purchasing term life insurance, you may want to discuss your policy with your agent about the available riders for your specific policy.
| Advantages of term life insurance | Disadvantages of term life insurance |
|---|---|
| Typically cheaper than permanent life insurance | No cash value component or investment potential to build wealth |
| Conversion and return-of-premium riders may add flexibility and peace of mind | Only covers a specified time period |
| Gives families the ability to cover significant financial liabilities that will eventually expire after a set period of time, such as mortgages and tuition | Sunk cost if you outlive the policy |
The benefits of term life insurance policies
When purchasing life insurance, it’s crucial to understand the difference between term and whole life insurance. Term life insurance has several benefits that make it a popular option for people who want a larger death benefit over a specific time period. It’s typically the most affordable form of life insurance, especially for younger individuals or new parents. The larger benefit for death at a reasonable cost can be used to cover children or dependent individuals if the parent(s) are unfortunate early on.
Many financial strategists recommend that individuals should invest the savings from choosing term life insurance over the more expensive permanent insurance. For policies with premiums that increase with age, the cost will not increase with the number of years in the policy, as it will with other life insurance products.
The disadvantages of term life insurance policies are numerous.
Life insurance with a term is limited by the fact that it cannot exceed the age of 70, the insurance limit for term life insurance. For instance, term life insurance policies provide a benefit for death if the insured dies, but these policies do not include a reserve account for cash. Whole life insurance policies, however, typically have a cash value account that possesses a limited interest rate and maximum return. Some permanent insurance policyholders utilize their accounts with cash value to create wealth, but this option is not available with a term policy.
Another potential downside of having a term life insurance policy is that it only has a limited duration. Because policyholders can live longer than the policies they have, there is a possibility that the benefit for death will never be distributed. A study from Penn State University shows that 99 percent of all term policies do not provide a benefit for death. However, this is because the majority of term policyholders don’t pay their premiums and instead allow the policy to lapsse, not because they live longer than the term, according to Entrepreneur.
