Life insurance rates depend on several factors, such as health, lifestyle, age and others. Some policies may offer a no-medical exam option, meaning you do not need a detailed health screening to get coverage. The trade-off is that premiums are higher and your death benefits are usually limited during the first two years the policy is in force.
Unlike whole life policies that remain in effect for the entirety of a person’s life and build cash value, term life policies do not accumulate a cash value benefit. The policies also do not accrue cash that a policyholder can borrow against later. The only policy value is the guaranteed death benefit if a policyholder dies during the time the term insurance is in effect and premium payments are current. The death benefit is income tax free unless paid with pre-tax money and can be issued in a lump-sum payment or as annuities.
Most policyholders also have the option to convert to a permanent life insurance policy, such as a whole or universal life insurance policy, after the term is up. Others may choose to renew their policy after the initial term, which is often offered without undergoing additional underwriting or medical exam processes.
Depending on the insurer, term life insurance may be offered in smaller amounts up to policies offering a multi-million dollar death benefit. You should shop with different providers to choose the best policy benefits based on your unique circumstances.
If a policyholder purchased a 20-year policy and died during the policy term, the insurer will pay the beneficiaries the policy’s face value death benefit. This cash payout can be used for any purpose, although many people use it to pay for the deceased person’s health care and funeral costs, consumer debt, mortgage debt and other expenses.
Types of Term Life Insurance
There are several kinds of term life insurance policies. Each is characterized by a defined period of time, but some differences are worth noting.
Level Term Policy
Level term insurance has a fixed monthly payment for the policy’s life. Most policies are issued for 10 to 30 years, although some insurer’s offer longer lengths such as 35 or 40 years. The death benefit is also fixed, but policies may be further customized by adding various riders.
Decreasing Term Policy
Death benefits for decreasing term policies decline each year according to a predetermined schedule. The policyholder pays a level premium for the duration of the policy, and the risk evens out over time to justify changes as time passes. These policies are often used for changing financial protection needs, such as tying the amount to a mortgage with the policyholder matching the payout of the insurance to the declining principal of the home loan.
Annual Renewable Term Policy
Annual renewable term policies are one-year policies that can be renewed annually without providing evidence of insurability. For a renewable term life insurance policy, the premiums change yearly as the insured person ages and their risk profile changes. Short-term policies may be good for an unexpected life change, but can get expensive if renewed for several years.
