Term Life Insurance: Simple Low-Cost Coverage
This article, Term Life Insurance: Simple Low-Cost Coverage, provides an overview of term life and a basic understanding of how life insurance works.
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Term Life Insurance Overview
Term life insurance offers basic protection for an insured, often at the lowest initial cost. This type of coverage is said to be “pure” insurance since it does not include many of the extra features available with other types of coverage, such as whole life or universal life.
Term life provides temporary coverage for a predetermined amount of time, or “term,” in which the policy premiums remain level. Typical term policies available in today’s marketplace offer level premium periods of 10, 15, 20, or 30 years. After the expiration of the level term most term life policies can be renewed at the annually renewable premium rates. This rate is based on the insured’s age at renewal and can represent a significant increase in premiums.
Many term life policies allow conversion to a permanent policy, subject to the issuing company’s guidelines, if the policy owner determines a need for permanent coverage.
According to Dave Ramsey, "term life insurance is the least expensive way to get the coverage your family needs and allows you to lock in rates for 15, 20, or 30 years."
Types of Term Life Insurance Policies
The basis for all term life policies essentially comes down to an amount of coverage, or death benefit, and the length of the term or level period. Based on this, there are several term policy options available for consumers. In choosing a term policy, it is important to consider the length of time that you will have a need for coverage. Common term policy options have been provided below for review.
Term Life Policy Options
Term Life Insurance Policy Riders
Though term life policies do not have many of the living benefits associated with permanent life insurance, there are several policy riders available that may provide additional benefits. These riders range from accidental death and children’s coverage to accelerated benefits and waiver of premium. In some cases, these riders are included in the base policy at no additional charge, and in other instances, there is an additional charge for certain benefit riders.
Specific riders available, and associated costs, for a given policy, are at the discretion of the issuing insurance company. Common term policy riders have been provided below for review.
Term Life Policy Riders
Common Uses for Term Life Insurance
Term life insurance is extremely popular in today’s marketplace because it provides appropriate coverage for most individual life insurance needs. Often a person’s need for coverage is tied to common life events and a desire to provide for those we love and pay what we owe.
Typical life events prompting a need for life insurance coverage may include getting married, purchasing a home, having children, planning for college, saving for retirement, and other financial obligations. Essentially, if you have a temporary need for life insurance coverage, term life is often the simplest and most economical option.
The following case studies provide insight into common scenarios where the use of term life insurance is appropriate.
Case Study #1
Jennifer is a 42-year-old single parent with three teenage children and is the only income earner for her family. Her annual income is $75,000, and she plans to continue providing financially for her children until they finish college. She has decided to purchase a 10-year $750,000 term life insurance policy for income protection. In the event of Jennifer's untimely death, the policy proceeds would replace her income through the children's college years, allowing them to complete their education.
Case Study #2
John is a 42 year old married man with two children, and is the primary bread winner for his family. He and his wife Emily have recently purchased a new family home and have a 30 year $300,000 mortgage. The couple has decided to purchase a 30 year $300,000 term life insurance policy for mortgage protection. In the event of John's untimely death, the policy proceeds would pay off the remaining mortgage balance, allowing Emily and the children to remain in the family home.
Cost of Term Life Insurance
Since term life insurance offers basic (pure) life insurance coverage for a limited period of time and does not accumulate cash value like many permanent policies, it is routinely the most economical form of coverage available. With that said, there can be significant differences in premium rates from one insurance company to another, and longer level premium periods traditionally increase the cost of policy premiums.
According to LifeHappens.org, "86% say they haven't bought life insurance because its too expensive, yet overestimate its true cost by more than 2 times."
When shopping for term life insurance, it is important to select an appropriate term period and amount of coverage based on your specific needs. Even though longer terms increase policy cost, it is to your benefit to select an appropriate term length, as opposed to choosing a shorter-term length and potentially paying significantly higher annually renewable rates to extend coverage in the future. On this note, beware of rising premiums by ensuring that the level term period you select is guaranteed.
Basically, purchasing what you need and not a penny more helps to ensure that you get the most value for your premium dollars. It is also important to compare rates from several insurance companies to find the most economical coverage. Working with an independent life insurance agent will allow you to compare rates from several top-rated companies before making a decision. An example of a typical rate comparison has been provided below for review.
Sample Term Life Rates
The rates illustrated below are for a $250,000 30 year term life insurance policy on a 35-year-old male non-smoker qualifying for the Preferred Plus underwriting class.
Best Term Life Insurance Companies
Choosing the best life insurance company for your individual situation can be a challenge, especially with numerous companies and policy options available. When comparing insurance companies, it is important to compare premium rates, but it is also wise to consider company ratings, policy offerings, underwriting standards, customer service, and other relevant factors. Being an informed consumer and having a basic understanding of how life insurance works is to your advantage. There are a number of outstanding companies in the marketplace, but below are a few of our recommended companies for term life.
AIG American General
American General Life Insurance Company
American National Insurance Company
Banner Life Insurance Company
Protective Life Insurance Company
Savings Bank Life Insurance Company of Massachusetts
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James Shiver is the founder of ChoiceLifeQuote.com and a multi-state licensed independent life insurance agent serving the individual family and small-business markets. Dr. Shiver also serves as a university business professor, as well as being an Accredited Financial Counselor®.