Life is unpredictable. While no one likes to dwell on death, it’s important to have the right life insurance policy to protect your loved ones should the unthinkable occur.
The good news is that you can give yourself and your beneficiaries peace of mind at a relatively low cost. While standard whole life insurance often comes with high premiums, term life insurance can present an affordable alternative. Since this kind of insurance only covers you for a certain number of years before you have to renew, some readers might wonder: is term life insurance worth it? Here’s how to decide if it’s the right fit for you.
What is term life insurance?
Term life insurance is a type of life insurance that provides coverage for a fixed period of time. The policyholder pays premiums to the insurance company during this period, and if the insured dies within that time frame, their beneficiaries receive a lump sum payment. Term life insurance policies are usually available for 5- to 30-year terms. While the cost of the premiums will depend on the amount of coverage, term life insurance is generally less expensive than whole life insurance.
There are three main term life insurance options to choose from.
Decreasing Term Plan: Under this plan, your “death benefit” — or the disbursement your loved ones will receive when you pass away — decreases monthly or annually at a predetermined rate throughout the policy term. While the death benefit will diminish over time, your premium won’t change. For that reason, decreasing term plans are potentially less affordable than other options. However, they can make sense if your beneficiaries are currently making loan or mortgage payments that you know will decrease over the course of the policy term.
Annual Renewable Plan: This option allows you to renew your policy on a year-to-year basis without having to reapply or take a medical exam. However, your premium will increase each year while the amount of coverage remains the same. These plans can only be renewed up to a certain age, which varies by carrier. (Most insurance companies provide coverage for 18- to 65-year-olds. However, many will cover individuals up to age 85.) An annual renewable plan may be best if you have beneficiaries with short-term debts that you know will be paid off within a few years.
Level Term Plan: With a level term plan, both your premium and death benefit stay the same for the duration of your policy. Though this option may start out with higher premiums than you’d see on an annual renewable or decreasing term plan, it provides more consistent financial protection. Level term insurance is a good option for someone looking to cover their family's immediate expenses as well as any future expenses.
Term life insurance vs. whole life insurance
Not all life insurance policies are created equal. Whole life insurance covers your family for your entire life. Term life insurance, on the other hand, offers more limited coverage, and you have to decide how long you anticipate needing the coverage for. The death benefit will be paid to your beneficiaries only if you die before the term is up.
The other key difference between term and whole life insurance is the price. Whole life insurance is substantially more expensive than term insurance. In some cases, the annual premiums can be five to ten times more expensive. This makes whole life insurance cost-prohibitive for many Americans.
Term life insurance might be a good option if you:
Are looking for an affordable way to protect your family financially
Need coverage for your dependents for a finite period of time
Are seeking coverage to help your partner pay a mortgage and other monthly bills that have an expiration date
Think you might want permanent life insurance in the future but can’t afford it right now. (Many term life policies can be converted to whole life coverage, though the deadline for conversion varies by policy.)
Whole life insurance might be a good option if you:
Want lifetime coverage starting now
Can afford a higher premium
Have a lifelong dependent, like a child with disabilities
Want a life insurance with a cash value component (a savings account that you can withdraw from or borrow against while you are still alive)
The benefits of term life insurance
Term life insurance is an excellent option for many families and individuals. Here are some of the benefits.
Term life insurance is more affordable than other types of life insurance plans — often one-fifth the cost of whole life insurance.
Term life insurance is straightforward and easy to understand: it simply provides a death benefit if you die within the paid policy term.
It’s easy to add more coverage. Most carriers let you easily up the coverage for your term by up to 10 times without incurring a huge premium increase.
If you die during your policy term, your beneficiary or beneficiaries will receive a lump sum from the life insurance company. Just like with whole life insurance, the death benefit disbursement will be tax-free. That means the recipient(s) can keep the full amount to use as needed.
If you decide to cancel your term policy while it’s active, you can do so without incurring fees or penalties. That can make it feel like less of a financial commitment than whole life insurance.
Term life insurance policies are flexible, offering many policy and payment options. You can choose to pay your premiums monthly, quarterly, biannually, or annually. You can also choose how long you need coverage; most life insurance companies offer terms anywhere from five to 30 years in length.
The disadvantages of term life insurance
Though term life insurance is more affordable than whole life insurance — and offers more flexible coverage — it does come with some downsides.
Term life insurance has no cash value component. Unlike whole life policies (which come with a tax-deferred savings account), there is no way to invest any part of your term insurance premiums. All funds are put toward your death benefit; you can’t manage or grow them over time. This means that if you don't end up using your term insurance’s death benefit, then all those funds go straight down the drain.
Term life insurance does not cover pre-existing conditions or long-term care costs. That includes conditions like diabetes or cancer. So, if these were already present before you purchased coverage, then they'll never be covered by that plan — and neither will any future occurrences thereof. The same is true of long-term care coverage: if a beneficiary needs help taking care of themselves due to old age but hasn't purchased supplemental long-term care insurance before the need arises, then they're out of luck.
Who should consider term life insurance?
Anyone looking to support their family's financial wellbeing should consider term life insurance. It is an affordable way to protect your loved ones in the event of a tragedy.