We’ve all been there. There’s a feeling that something is important, and that you should think about doing it, but you’re not completely sure what it even is.
For many, life insurance falls into this bucket. You want help protecting your loved ones, but you’re not sure where to start. It can feel confusing, but the truth is it’s not that complicated.
Put simply, life insurance policies are a form of financial protection for your loved ones after you pass away. And term life insurance coverage is a kind of insurance that generally comes with a lower price tag than some other varieties. As with any financial product, there are reasons why term insurance may or may not be the best fit for your needs. In order to understand how a term policy works, let’s cover some basics about life insurance in general. It’s not that complicated. Promise.
Life Insurance Basics
A life insurance policy is a financial agreement between a policyholder and an insurance company. If a policyholder pays a premium for a certain amount of time, the insurance company pays money to their beneficiaries after they pass away.
Beneficiaries are the people you designate to receive benefits if you pass away — like a spouse, partner, or child.
Your coverage amount is the amount of money you want an insurance company to pay your beneficiaries in the event of your death.
Your premium is what you pay to maintain your coverage. Usually, this is in the form of a monthly premium payment, though not always. Your premium amount is determined in part by factors like your age, health, term length, and the coverage amount.
Your term length is the amount of time you will be covered by a policy and pay a monthly premium.
What is Term Life Insurance?
There are two basic types of life insurance policies: term and permanent.
Permanent life insurance policy
A permanent policy provides coverage that lasts your entire life, with a guaranteed payout upon your death. Some permanent policies also carry a cash value that you can borrow against. Many people find the monthly premium cost of a permanent insurance to be much higher than that of a term life policy.
Term life insurance policy
So, what is term life insurance? It provides coverage for a specific amount of time that you choose when you buy coverage. A typical example of a term policy length is 10, 20, or 30 years. If you pass away during the term of your policy, the insurance provider will pay your beneficiaries your coverage amount, after your claim is approved. Because your coverage only lasts for a set amount of time (unlike permanent life insurance), you may find the monthly premium cost to be more affordable. It could be a smart option if you’re looking to help protect your loved ones but are worried about the life insurance cost.
How Does Term Life Insurance Work?
Term life insurance policies vary by term length, coverage amount, type, application requirements, and benefit options. We’ll break down each of those things here.
Typical coverage lasts for 10, 15, 20, 25, or 30 years. You may want to select a term length that helps cover your financial obligations. When evaluating your options, you can ask yourself questions like:
- How long will it be until I pay off my mortgage?
- When will my children no longer be dependents?
- When will I be able to pay off my debt?
Answering these questions may help you land on your ideal term length.
The Cost Advantage Of Longer Policies
Twenty, even ten years, feels like a major commitment. The good news is that you can walk away from your coverage at any time without a penalty. But you won’t get your money back (a term life policy has no cash value), so it’s important to select a coverage option with premiums you can manage.
The major benefit of taking out a longer policy is that you’ll lock in your premium at the age you are now. Rates often go up as you get older and your health may change for the worse.
Deciding how much coverage your beneficiaries may need after you pass away is where a lot of people get hung up. The truth is there is no one right answer. The appropriate coverage amount depends on a number of things, including your beneficiaries’ needs and lifestyle.
Consider how much debt you have, your children’s education budget, your income, and other financial goals. Funeral and burial costs are also worth considering.
To determine your coverage amount, ask yourself, “If I were to pass away today, how much money would my family need to supplement income, pay off debt, maintain our home, and reach their goals?”
Keep in mind that the more coverage you take out, the more you’ll pay each month. It’s tempting to take out a large policy, but with that comes larger premiums. And if you default on premiums, your policy may be canceled. Consider your needs, but also your budget.
Once you decide you want a term life insurance policy, you have more than one option to choose from:
- Level Premium: your premiums stay the same for your entire term length.
- Return of Premium: you’ll get your premiums back (tax-free) if you live longer than the term length, but your premiums may be significantly higher.
- Convertible Term: you can change from term to permanent life insurance without additional screenings with a higher premium.
- Renewable Term: you can renew your policy without additional screenings, but your new premiums will reflect your older age.
- Group Life Insurance: one policy can cover multiple people. This is most often used as an employee benefit. A nice perk, though it usually has a limited coverage amount, and you typically lose coverage if you change jobs
Some companies offer additional policy benefits, called riders, that often raise your premiums. Examples include a terminal illness rider that allows you to begin collecting benefits if you are diagnosed with a terminal disease. Some companies offer a child rider, which adds your child to your life insurance plan.
Most insurers require you to get a medical exam to gauge your current health. This is to determine if you have any preexisting medical conditions that make you uninsurable.
The exam is free to you, and typically takes around 45 minutes to complete. Requirements vary depending on the life insurance company, but exams usually include basic measurements like height, weight, and blood pressure, as well as other tests like blood and drug testing.
These tests are meant to determine your risk for stroke, heart disease, and other ailments that impact your life expectancy. The healthier and younger you are, the lower your premiums will generally be.
Not all companies require medical exams, though. If you’re needle shy, or you’re simply hoping to get affordable coverage quickly, Bestow makes it possible to apply and, if approved, buy life insurance online in minutes with no medical exam.
Your coverage amount will go to your beneficiaries. Your beneficiary could be a spouse, child, sibling, a trust for a minor, or even a pet (though that gets a little more complicated and usually requires an attorney). Essentially, you typically want to select beneficiaries whose finances could be adversely impacted by your death.
Typically, your term life insurance insurer will provide a payout to your beneficiaries if you die within your policy term. However, it’s also important to know what types of circumstances your insurance policy will cover. Not every death will result in a payout.
Term Life Insurance usually covers:
It typically doesn’t cover:
- Suicide within an initial period after coverage begins
- Acts of war
- Certain high risk activities, like auto racing, for example.
The big perk here is that your payout doesn’t go through the probate process (like a will would), giving your beneficiaries a lump sum cash payment right away for things like funeral expenses and other bills. And in most cases, the death benefit is tax-free.
What Happens at the End of the Insurance?
If you happen to outlive or reach the end of your life insurance policy, your provider will most likely send you an email. It will likely be to inform you that you no longer have coverage as well as provide you with options. These options will likely include options to apply for new insurance or converting it. If you have return of premium coverage, the company will be giving you a check as well.
You Could Get Approved For Coverage Today
A term life insurance policy may help provide you with the confidence and peace of mind that you’ve got a plan for your loved ones’ future, and Bestow makes it quick and easy to apply online. There are no medical exams, and if you qualify, you could have coverage today. Get a fast, free life insurance estimate here.
Bestow does not give tax or legal advice. The information provided is not intended to offer any tax, legal or financial advice. It is always a good idea to consult your tax, legal and financial advisors regarding your specific situation.