A large majority of the American population, around 80%, worries about their financial security in case of an unexpected death. Surprisingly, a recent study revealed that nearly 30% of these individuals do not possess life insurance.
This informative guide aims to assist you in deciding whether term life insurance is a suitable option for you, how much coverage you should consider, and the essential factors to consider before buying a term life policy.
You Might Also Like:
What is Term life insurance?
Term life insurance is a straightforward and uncomplicated type of life insurance. With this policy, you make premium payments for a specific period, typically 10, 20, or occasionally 30 years. In the unfortunate event of your death within this designated time frame, your family or chosen beneficiary will receive a monetary benefit.
Term life insurance is generally more affordable compared to whole life or universal life insurance. However, unlike permanent life insurance options, term policies do not offer coverage for the entirety of one’s life, do not accumulate any cash value, and essentially only hold value in the form of a death benefit.
How Term Life Insurance Works
Term life insurance policies are priced by insurance companies based on various factors, such as the coverage amount and the individual’s age, gender, and health. The company also takes into account its own expenses, investment earnings, and mortality rates for different age groups.
Occasionally, a medical examination may be necessary. The insurer may also ask about the individual’s driving history, current medications, smoking habits, occupation, hobbies, family medical background, and other relevant details.
When you pass away within the specified period of your policy, the insurance company will provide a sum of money to your chosen beneficiaries. This amount, also known as the face value, is typically not subject to taxation. Your beneficiaries can use this cash benefit to cover various expenses such as healthcare and funeral costs, consumer debt, mortgage debt, and other financial obligations.
However, they are not obligated to use the insurance proceeds to settle any outstanding debts left by the deceased. If you outlive the policy term or the policy expires before your death, there will be no payout. In some cases, you may have the option to renew the term policy upon expiration, but the premiums will be recalculated based on your current age.
How much life insurance you should consider
Determining the appropriate amount of term life insurance coverage largely depends on your current life situation and the number of family members who rely on your income. While industry guidelines often recommend having coverage worth 10 times your salary, the average working American typically has life insurance coverage equivalent to two to four times their salary.
However, this may not be sufficient, especially for individuals with dependents. Generally, the younger you are, the greater the need for coverage to account for potential future earnings. Additionally, if you have more family members depending on your income, it is advisable to consider higher coverage to replace that income in the event of your passing.
Cost of Term Life Insurance
Term life insurance is an affordable option for individuals looking for life insurance coverage. Unlike permanent insurance, term life insurance does not have a cash value component and provides a death benefit for a specified period of time.
For instance, according to Insureon, a 30-year-old healthy non-smoking man could obtain a 30-year term life insurance policy with a $500,000 death benefit for an average monthly premium of $30 in February 2023. However, it is important to note that the premium increases as the insured individual gets older. At age 50, the monthly premium would rise to $138.
| Term Life Insurance Rates | ||
|---|---|---|
| $500,000 Coverage | Average Monthly Cost, Male | Average Monthly Cost, Female |
| 30 years old | $30 | $25 |
| 40 years old | $52 | $42 |
| 50 years old | $138 | $101 |
| 55 years old | $241 | $180 |
On the other hand, let’s examine the rates for a $500,000 term life insurance policy. Term life insurance is a temporary policy that provides coverage for a specific period of time. Compared to whole life insurance, it does not accumulate cash value and only lasts for the agreed-upon term.
For a 30-year-old male in good health, the average monthly premium would be $282. However, the cost increases as the individual ages.
Whole Life Insurance Rates
Many term life insurance plans come to an end without providing any payout upon the death of the insured individual. This decreases the level of risk for the insurance company in comparison to permanent life insurance policies. The decreased risk is a contributing factor that enables insurers to offer lower premium rates.
Premiums for term life insurance can be influenced by various factors such as interest rates, the financial stability of the insurance provider, and state-specific regulations. Typically, insurance companies tend to offer more favorable rates for coverage amounts at certain breakpoints, including $100,000, $250,000, $500,000, and $1,000,000.
Example of Term Life Insurance
Felix, a 30-year-old individual, aims to safeguard his family’s financial security in the event of his untimely demise. To achieve this, he opts to purchase a term life insurance policy worth $500,000, valid for a duration of 10 years. The premium for this policy amounts to $50 per month.
In the event that Felix passes away during the 10-year term of the insurance policy, his chosen beneficiary will receive a payout of $500,000. However, if Felix were to pass away after the policy has expired, his beneficiary would not receive any benefits. Alternatively, if Felix decides to renew the policy after the initial 10 years, the premiums will be more costly due to his current age of 40 being taken into account, as opposed to the initial age of 30.
In the event that Felix receives a diagnosis of a terminal illness within the initial term of his policy, it is unlikely that he will be able to renew the policy once it reaches its expiration date. While certain policies may provide guaranteed re-insurability (without requiring proof of insurability), these features typically come at a higher cost.
Types of Term Life Insurance
When it comes to term life insurance, there are various options available. The choice that suits you best will be based on your specific situation. Typically, insurance companies provide terms that can range from 10 to 30 years, although a small number of them may offer terms of 35 or even 40 years.
Level Term or Level-Premium Policy
Term life insurance with a level-premium structure ensures that policyholders have a consistent monthly payment throughout the duration of their policy. This type of insurance is commonly referred to in this article and offers coverage for a period of 10 to 30 years.
The death benefit remains fixed throughout the policy’s term. Due to the need for actuaries to consider the rising costs of insurance over time, the level premium for this type of insurance is typically higher when compared to yearly renewable term life insurance.
Yearly Renewable Term (YRT) Policy
Term life insurance refers to policies that are renewable on a yearly basis without the need for proving insurability. These policies require the insured person to pay higher premiums as they grow older. Consequently, the premiums can become unaffordable for the policyholder as they age. However, yearly renewable term policies can be a suitable choice for individuals seeking temporary insurance coverage.
Decreasing Term Policy
Term life insurance refers to insurance policies that provide a death benefit that decreases over time based on a predetermined schedule. Throughout the duration of the policy, the policyholder pays a consistent premium amount. Decreasing term policies are commonly utilized alongside mortgages, allowing the policyholder to align the insurance payout with the decreasing principal balance of their home loan.
Benefits of Term Life Insurance
Young individuals who have children find term life insurance to be appealing. It provides extensive coverage at an affordable price, ensuring that if the policyholder passes away during the policy’s duration, their family can depend on the death benefit to make up for the loss of income. Moreover, term life insurance is ideal for individuals with expanding families as it offers the necessary coverage until their children become independent adults.
Term life insurance can be beneficial for older surviving spouses as well. However, individuals who apply for insurance at an older age will have to pay higher premiums compared to those who had obtained a level-term policy at a younger age. Insurance companies typically have a maximum age limit for their term life insurance coverage, which typically falls between 80 to 90 years old.
Do You Get Your Money Back at the End of a Term Life Insurance Policy?
When the specified term of your term life insurance policy ends and you are still alive, you will not receive any payout. The death benefit offered by term life insurance policies is only given to your beneficiaries in the event of your death. This is the main reason why term life insurance is generally more affordable compared to other types of insurance. It is important to note that most individuals tend to outlive their term life insurance
Can a Senior Citizen Get Term Life Insurance?
The age of an individual plays a crucial role when it comes to term life insurance. Insurance companies typically establish a maximum age limit for these policies, which usually falls between 80 and 90 years old. However, this age limit can vary depending on the specific insurance company. Additionally, as individuals get older, the premium for term life insurance increases. Hence, someone who is 60 or 70 years old will have to pay significantly more for this type of insurance.
How to get term life insurance
A variety of businesses provide term life insurance as a component of their employee perks, and this is usually a more economical choice compared to purchasing a personal policy. However, there may be limitations on the total coverage amount available. For instance, the maximum coverage you can obtain might be capped at three times your salary, and if you resign from the company, your insurance coverage could be forfeited.
If the coverage provided by your employer is insufficient, it is important to consider purchasing additional term life insurance. Fortunately, shopping for term life insurance is typically a straightforward process. Numerous companies offer the convenience of providing instant online quotes. It is recommended to compare insurance rates from multiple sources and carefully evaluate the reputation and reliability of the term life insurance company before making a decision.