Term Life Insurance

What is term life insurance?

 

Term life insurance is the cheapest, simplest type of life insurance.  Term life insurance is temporary, meaning that a policy of term life insurance provides coverage for only a certain number of years (you can choose 5, 10, 15, 20, 25, 30 years… depending on the life insurance company and your needs).  Any life insurance policy that is not a term policy is permanent life insurance.

 

How term life insurance works

 

A standard term life insurance policy guarantees fixed premiums. That means that the size of payments made to the life insurance company does not change over time. You make payments, all of equal amount, at equal intervals of time (monthly, quarterly, semi-annually, or yearly, depending on the company and policy). You are free to discontinue payments at any time; if you do so, however, the policy will terminate.

 

A standard term life insurance policy guarantees a fixed death benefit. That means that the death benefit will be of a certain amount regardless of how long the policy has been in force. The insurance company will pay the same amount if the insured dies during the first day of coverage as if he/she dies during the 29th year of coverage.

 

Term life insurance policies provide temporary coverage. For example, a 20-year policy is intended to provide coverage for 20 years and no longer.

 

At the end of the term…

 

You might imagine that your life insurance is simply gone at the end of your term of coverage: if the insured is still alive, your beneficiary gets nothing. That’s not a bad thing; after all, a healthy, living person is preferable to a cash payment. However, there are usually alternatives to letting your coverage simply cease.

 

Most term life insurance policies simply don’t terminate after the “term of coverage.” You can keep paying premiums and keep enjoying coverage. However, after the specified term of coverage, the rates you pay are no longer fixed at the level they were. Your contract will probably stipulate new rates higher than you were originally paying. Continuing your “temporary” life insurance is typically allowed only until the insured attains a certain, advanced age.

 

Another option is conversion. Conversion means that your life insurance company will replace an existing term life insurance policy with a permanent life insurance policy of the same face amount  death benefit. Life insurance companies tend to offer at least one, but it may not be a desirable one. For instance, your only option may be to convert to a permanent policy whose rates are guaranteed for only a decade. Moreover, you may not be able to exercise the conversion option at just any time. For instance, conversion may only be allowed during the first five years of your term life coverage.

 

A final option is renewal, but this option is comparatively rarer than the preceding options. Renewable life insurance can be replaced with a life insurance policy of the same type, face amount, and health class. Renewing life insurance spares you the hazard of being assigned to a more expensive health class. However, life insurance rates trend downward so long as life expectancy trends upward, so unless the health of your insured has deteriorated, you may find better life insurance rates by starting the application process anew.

 

Who should get term life insurance?

 

Term life insurance is not just for bread winners. It is commonly purchased for the following reasons:

• Pay for child care

• Fund higher education

• Cover debts or liabilities (e.g. mortgage, funeral costs)

• Fund a buy-sell agreement for a business

• Protect against the loss of a key employee

• Replace an income stream

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If you have children at home, carry debts, or own a business, term life insurance may be a good (and inexpensive) asset to maintain.

How to shop for term life insurance

 

To start, estimate your needs: how long you’ll need coverage and how much coverage (death benefit) you require. You can use this life insurance needs calculator provided by Prudential as a starting point. Our team of life insurance specialists can discuss your needs in more detail with you.