If you’ve been thinking about personal finances and the future lately, you may have started to think about life insurance, including term life insurance. It’s not fun to think about your mortality, but life insurance can bring peace of mind to many people. It’s a way to protect your family and loved ones. In 2018, the average life insurance payout was approximately $168,000 in the United States. That amount of money can help a family cover funeral costs and prepare for the financial burden of life with one less income earner.
When it comes to life insurance, you have different types of policies you can choose from. Term life insurance is actually one of the most popular insurance options out there. Keep reading for a complete overview of everything you need to know about term life insurance so you can determine if it’s right for you.
Why Do People Get Life Insurance?
Life insurance is entirely optional and not something everyone chooses to participate in. Still, millions of Americans have enrolled in life insurance plans. According to Statista, the top reasons people get life insurance as of 2020 are:
- Covering funeral costs
- Passing wealth onto dependents
- Replacing lost income
- Supplementing retirement income
- Paying off a mortgage
What Is Term Life Insurance?
Term life insurance guarantees coverage for a set period, often 20 years. Term life insurance is sometimes called pure life insurance. If the insured dies within that period, their policy is paid out to the beneficiary. No payout is made if the policyholder lives beyond the covered period.
Term life insurance has no cash value. After the period ends, the policyholder can choose to renew the policy. Otherwise, it simply expires, and no further payments need to be made. Most insurance companies set an age maximum for term life insurance coverage. For example, they will not sell a term life insurance policy where the policyholder exceeds 80 years of age during the covered period.
Unlike some other types of life insurance, term life insurance comes with fixed premiums for the coverage period.
Getting Term Life Insurance
One of the biggest appeals of term life insurance policies is that they’re relatively flexible, and you can choose one based on your needs. The policies account for your age, gender, health, length of coverage and the payout amount you wish to receive. The longer the coverage and the higher the payout amount, the more expensive your monthly insurance payment will be.
Some term life insurance plans require you to take a medical exam or provide additional personal information, such as your driving records or family medical history before you’re approved.
Your beneficiary will receive the specified payout if you pass during the covered period. This payout is usually tax-free and can be used to cover funeral costs, outstanding medical bills, debts and mortgage payments, and other expenses.
Term life insurance is typically bought for an exact period (10, 15, 20, or 30 years) or until a specific age (usually until 65).
Benefits of Term Life Insurance
There are many benefits to term life insurance, including:
- Protection: Peace of mind that loved ones can manage financially with bills.
- Affordable: Term life insurance locks in a fixed payment for the coverage period. This is usually cheaper than other life insurance plans, such as whole life insurance.
- Simple Payments: The monthly payments are fixed, so you can easily budget and plan for them.
- Flexible: You can choose how many years you want to be covered (10, 15, 20, 30, etc.) and the payout amount.
- Straightforward: Some life insurance plans can be convoluted, but term life insurance is pretty clear and easy to understand.
- Tax-Free: In most situations, the payout is tax-free, so beneficiaries receive the full amount.
Cons of Term Life Insurance
Of course, no type of insurance is perfect, and there are some downsides to term life insurance.
- Signing Up Late is Expensive: Generally speaking, the earlier you sign up for term life insurance, the better. Someone in their 20s will get a much cheaper rate than someone in their 30s.
- No ROI: Term life insurance has no cash value. If you survive the covered term period, your beneficiaries and you receive nothing.
- When It Ends, You Have to Renew: At the end of your term life insurance policy, you’ll need to renew to have continued coverage. Unfortunately, since several years have passed, the renewal will often be at a much higher rate.
Other Types of Life Insurance
Life insurance policies typically fall into two primary categories: term life insurance and permanent life insurance. Permanent life insurance, also known as whole life insurance and universal life insurance, is a policy you pay into, knowing that your beneficiary will receive that money at some point. This type of life insurance covers you for the rest of your life. Permanent life insurance does hold a cash value and is significantly more expensive than term life insurance.
Is Term Life Insurance Right For You?
Young couples and families favor term life insurance. If you want the reassurance that your loved ones will be taken care of in the event of your passing, term life insurance is a great solution. In addition, term life insurance is a great “security blanket” for those with significant financial burdens — like families with consumer debt, car loans, mortgages, or student loans. And, if you’re young enough, it’s an affordable solution that should easily fit into your budget.
It’s not always enjoyable to think of your own passing, but knowing that you’re leaving a financial cushion to those you love most can be incredibly comforting.
You might also be interested in: What Is Universal Life Insurance?