When Should One Purchase Term Life Insurance?
Term life insurance is a policy that is in force for a set period of time. During that time (the term of the policy), the insured pays the premiums and if she or he dies, the beneficiary is paid the face value of the policy. If the insured lives longer than the term of the policy, the insurance policy expires and the insured does not recover any cash value from the policy.
A majority of life insurance policies sold are term life policies. An executive at one leading insurance company reported that over 85 percent of the policies sold by that company are term policies. The following benefits of term life insurance explain its popularity.
Term Life Insurance Premiums Are Lower than Whole Life Insurance Premiums
Term life insurance is less expensive than permanent life insurance. While premiums for both types of insurance are based on age, gender and health status, because permanent life insurance always pays a death benefit and also builds up a cash value, the premiums are much higher. A term life insurance policy only pays out if the insured dies while the policy is in effect. If the insured lives longer than the term of the policy, the term life insurance policy has no cash value.
Term life insurance is usually sold in terms of one year, five years, ten years, twenty years or thirty years. Most term life insurance policies provide guaranteed level premiums, which means that at the time the policy is issued, the insured knows the amount of the monthly (or periodic) premiums for the entire time the policy is in effect. This provides predictability for planning purposes. Note that premiums should always be discussed before purchasing life insurance. Some term life policies only guarantee level premiums for a portion of the term — after that, the premiums increase.
Term Life Insurance Offers Flexibility as Life Insurance Needs Change
The main reason people buy life insurance is to provide for the needs of loved ones who depend on the insured’s income. Decisions about how much insurance to buy are usually based on the income that needs to be replaced and the projected living expenses of the beneficiaries.
These needs change over time. The living expenses of a full-time mother raising three young children are quite different than what that same mother would need when her children are all in the workforce. However, with a permanent life insurance policy, the premiums and the payout would be the same for both scenarios.
Term life allows life insurance to change according to the phase of life a person or family is in. Paying for the needs of several dependents supported by a sole wage-earner might require a high amount of life insurance, while supporting a sole widow after the children are grown and the mortgage is paid off might require a lower amount or none at all. For a variety of reasons, many adults of retirement age do not need an insurance payout to maintain their existing lifestyle, so a whole life policy means they pay a high premium for a service that is no longer essential.
Term Life is Straightforward and Easily Comparable Across Insurers
Permanent life insurance is available in a variety of configurations, often individualized to match the needs of the insured. In contrast, term life insurance policies are fairly standardized. Certain clauses may be different across insurance providers, and individual riders may be available for particular circumstances, but in general, the policies are nearly the same. Premium pricing for all companies is based on gender, age and risk classification so consumers can easily comparison shop among insurance companies.
Life insurance lawyer Chad G. Boonswang works with families across the country that have benefited from term life insurance policies.