What is term life insurance?

Term life insurance is a sort of short-term life insurance that pays a death benefit to your dependents if you die while the policy is in existence. A death benefit is a monetary sum that can give financial security to your family and loved ones in the event of your death.

The most frequent duration of a term life insurance policy is ten years. If the insured lives over the policy's active period, the coverage simply ends, and the policyholder must renew or enroll in another life insurance policy.

Pros and cons of term life insurance

How Term Life Insurance Works

Life insurance is a contract between the policyholder (the owner or insured person) and an insurance provider. The owner agrees to pay premiums for a specified number of years — often between 10 and 30 — with the understanding that if the owner dies during this time period, the insurance company will pay out a death benefit to their selected beneficiaries when a claim is submitted. Death benefit payments are not taxable income and can be used for any expenses incurred after the insured's death, such as funeral expenses, education, debt repayment, and so on.

Before term insurance can be finalized, the insured must go through an application process. This is the period during which an insurance company evaluates and prices your risks as a client. This often entails a medical checkup and an assessment of your lifestyle; insurers will want to know about your occupation, hobbies, and other interests in order to assess your mortality risk and set your premiums accordingly. Smokers and individuals who engage in risky activities, such as scuba diving and working on oil rigs, will pay higher rates.

During this phase, the insured must make key decisions regarding their term life insurance policy:

• Term length and type: Whether you have a one-year or 30-year term, you must pay premiums on a consistent basis through this time.
• Death benefit amount: Consider your annual pay, proximity to retirement age, and present and prospective expenses when calculating your death benefit amount. While projecting your beneficiaries' financial prospects is never straightforward, a life insurance agent can assist you in ironing out the intricacies and settling on the appropriate figure for your scenario.
• Beneficiaries: When you die, the money will be distributed to your beneficiaries. A term life insurance beneficiary can be a single individual or a group of people, trusts, charities, or organizations. The death benefit can also be shared among entities, such as leaving half to a spouse and half to each of two adult children.

Who needs term life insurance?

For those entering adulthood, term life insurance is often preferable to whole life insurance. If you're nearing a milestone in your life, such as getting married, buying a house, or beginning a family, term life insurance makes more sense than whole life insurance.

Term life insurance may be beneficial for a variety of reasons, including:

1. It is significantly less expensive than full life insurance. For younger individuals, term life insurance is quite reasonable, and unlike permanent life insurance, you are not tied to a lifelong policy and the increased premiums that come with it.
2. It’s a shorter commitment with some flexibility. A term policy will allow you to replace your income over a set period of time, such as when you are paying off a mortgage or raising a family. You can reevaluate your life insurance needs and adjust coverage after it expires if your financial condition changes over time. Furthermore, most term life insurance policies can be transferred if you change your mind and want permanent coverage with a whole life policy.

What are the different types of term life insurance?

Once you've determined that term life insurance is the best option for you and your family, you'll need to choose the type of policy. Each has various benefits (and costs) during the course of the policy.

• Level term:Your premiums will be stable and unaltered during the period of your coverage. This is the most prevalent type of term life insurance and is sometimes referred to as level premium term life insurance.
• Decreasing term: The death benefit, also known as the face value of the policy, will drop annually until it reaches zero at the end of the policy. When compared to level term life insurance, decreasing term life insurance is quite rare.
• Annual renewable term: Although this sort of term policy only lasts one year, it can be renewed yearly for a certain number of years. Your premiums, however, will not be level year after year, as they are with a level term insurance; instead, they will rise with each renewal.
• Return of premium: If you outlast the policy and it expires, the premiums you paid will be refunded (in full or in part). The disadvantage of this sort of term policy is that it is more expensive — it is two to three times as expensive as a standard term policy.

Term life insurance riders

Riders can be added to the terms and conditions of a term life insurance policy. These raise your level of protection in the event that unanticipated problems or conditions emerge.

Common riders, such as the term conversion rider, are typically included with a term life insurance policy. Other riders may be added at an extra cost:

• Accelerated death benefit: This option lets you access a portion of your death benefit while you are still alive to cover eligible expenditures related to a serious illness. This rider may already be included in many policies.
• Critical illness riders: Like the accelerated death benefit, critical illness riders assist you in paying for medical bills while you are still alive. In anticipation of these eventualities, you can add coverage for chronic sickness and long-term care to your policy. If you become disabled, your premiums will be waived if you have a waiver of premium for disability riders.
• Accidental death and dismemberment riders: This pays out from your death benefit if you die or become dismembered in an accident. It is best for those who indulge in hazardous hobbies or vocations.
• Family riders: These add members of your family to your life insurance policy. For example, if your spouse dies, a spousal insurance rider will pay you a death benefit as if you were a beneficiary. Family riders, on the other hand, do not provide as much coverage as getting a separate life insurance policy on that family member.

How to determine how much term life insurance you need

Death benefits can range from $20,000 to millions of dollars. When you apply for life insurance, the amount of coverage you qualify for is determined by your income, assets, and overall net worth.

Many life insurance agents and experts advocate multiplying your annual income by 10 to 15 to get a rough estimate of how much life insurance you require. However, this is a very basic assessment that does not take into consideration the entire picture of your and your family's financial situation. You must factor in any dependents and existing debts, especially if you are the primary source of income, as well as the cost of end-of-life care, education or schooling expenditures for any children, and other expenses.

The DIME formula, which stands for debt, income, mortgage, and education, might help you determine how much term life insurance you need:

• Debt: With the exception of your mortgage, total all of your debts, including vehicle loans, student loans, credit cards, and any other forms of debt.
• Income: Divide your annual income by the number of years your family will require assistance if you die. This can be a difficult question to answer, especially if you have children; in this instance, multiply your income by the number of years it will take your youngest child to graduate from high school.
• Mortgage: How much of your mortgage debt do you still owe? This sum should be considered in your calculations so that your family is not financially obligated to repay the mortgage.
• Education: If you have children, a decent rule of thumb for figuring their future education costs if they attend college is $100,000 per child.

If you total up all four of these amounts, you'll have an idea of how much life insurance you'll need to cover your beneficiaries' future needs, essentially filling the financial gap left behind if you're no longer able to work.

What is the distinction between term and whole life insurance policies?

The main distinctions between term and whole life insurance are whether or not there is a cash value component and how long each type of coverage is valid.

Death benefit alone versus death benefit plus monetary value

Term life insurance is simple in that it is the most basic kind of life insurance and merely gives a death payout. Whole life insurance policies can be complicated since they provide both a death benefit and a cash value component. Many whole life insurance clients use the collected cash value to augment retirement income while they are still alive; nevertheless, it should be highlighted that there are better alternative investment vehicles than cash value, as it accumulates slowly over the insured's lifetime - especially during its infancy.

Temporary vs. permanent coverage

Another key distinction between term and whole life insurance is the time period covered. Term life insurance is a policy that covers the owner for a certain number of years and must be renewed to maintain coverage. While term life insurance rates begin low and flat throughout the policy, they will grow in the future at each renewal period.

Whole life insurance (also known as cash value life insurance) provides perpetual coverage with level premiums for the remainder of your life while the policy accumulates cash value. A portion of every premium payment you make gets diverted as cash value. However, the cost of whole life insurance is substantially more than that of term life insurance because coverage remains in place for your entire life and often comes with more bells and whistles in terms of policy terms and conditions. In addition, unlike term life insurance, there are several types of permanent insurance, such as universal life insurance, that provide more flexibility.

Tips for Buying Term Life Insurance

With so many aspects to consider when purchasing life insurance, we recommend taking it one step at a time to determine your needs before plunging into shopping. Here's a step-by-step guide to purchasing term life insurance.

Determine the amount of life insurance you require.

A decent rule of thumb is to double your annual income by ten to fifteen times. Calculate your outstanding debts, including your mortgage, credit cards, school loans, auto loans, and everything else you owe money on. You will essentially need to determine how much of a financial void will be left if you die. Using the DIME method — as well as visiting a life insurance agent — will assist you in developing a comprehensive view of your and your family's financial demands, as well as their future spending. During this time, you should also consider how long you want your policy to last and whether you'll need any additional riders to augment your coverage.

Look into life insurance companies and pricing.

Once you've agreed on a death benefit that both you and your beneficiaries are happy with, it's time to seek the best life insurance provider. Every business rates plans differently, and though term life insurance is quite inexpensive, you'll still need to spend some time investigating what a reasonable premium looks like.

Shop around and apply

Get life insurance quotes from the companies of your choice and weigh the benefits and drawbacks of each. The cheapest option is not always the best option; it is critical to conduct research about each company's customer service and how they handle and process claims.

Once you've decided on a life insurance provider, you must complete the application and proceed with the rest of the application process, which typically includes a medical exam or physical as well as an assessment of your lifestyle and hobbies. These are utilized during the underwriting process to finalize your policy and the amount of premium you will pay.

If you're looking for life insurance coverage, think about Ethos: an inexpensive, flexible alternative for term and whole life insurance coverage. Get a life insurance quote in as little as 10 minutes.