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As we move through the month, we are continuing to expand upon the subject of life insurance in light of Life Insurance Awareness Month. We covered the basics of life insurance last week in hopes to help our readers whom are thinking about purchasing life insurance for the first time better understand all its complexities. Last week we covered common insurance questions, types and terms of life insurance, whole life insurance, and tools to help understand how life insurance works.
What is Term Life?
Term life insurance isn’t designed to last the lifetime of the policy holder; it’s designed for temporary circumstances. So who should consider this type of insurance? Those who waited until their 60’s -70’s even- to buy life insurance, those who planned out for the insurance to expire once their children graduate from college, and even young families who are on a tight budget. The typical time-period is between 10-30 years, with 20 years being the most common term. Like most life insurance policies, you pay a premium every month that will give you security that your beneficiaries will be paid the face value of the policy.
Pros and Cons
The biggest advantage to this type of insurance is that it’s the cheapest available. You are able to afford more coverage for a reasonably small premium. If you’re a healthy 20 something, for example, you could pay a little over $100 per month for $100,000 worth of coverage. Now for the bad side; if you outlive the term of your policy, you now have nothing to show for it. LifeHappens.org has a good analogy for understanding this:
“When you purchase term insurance, it’s sort of like renting a house…you get full and immediate use of the house, but only for as long as you continue paying rent. As soon as your lease expires, you must leave. Even if you rented the house for 30 years, you no equity or value that belongs to you.”
There is a solution, though, by renewing your policy once you reach the end of your term, but it may come at a price. Unless you are eligible for an automatic coverage renewal, your insurance provider will likely make you complete a medical exam. By now, you have aged (age is a key factor) and maybe even developed some health problems, causing your premiums to rise. If you want a set premium, term life isn’t the option for you (permanent life insurance usually remains level).
Alternatives to Renewal
Another option to consider if you’re concerned about the expiration of your policy is a return-of-premium policy. In this situation, you will pay a higher premium in order to receive a refund of your payments when the term runs out, as long as the policy remained in effect for the entire term. Failure to keep the policy in effect will result in a significantly lower return. The premiums for a return-of-premium policy are usually higher than standard term life premiums. Another factor to consider is -due to technological advances in the medical field allowing people to live longer- insurance rates may drop. Evaluate what the odds are that you will drop your policy before the term runs out in order to determine if you should get a standard term life policy or a return-of-premium policy.
Aside from the cost of insurance, another factor to consider for term life insurance is the difference in riders, or provisions, which may come with an additional fee. The three provisions are as follows:
- Accelerated Death Benefits- This rider allows you to dip into your benefits in order to pay for a chronic condition, terminal medical condition, severe disabilities, and other situations. Dipping into your benefits will obviously lower the amount your beneficiary receives upon your death.
- Disability Waiver of Premium- This is a type of disability insurance that will take effect if the insured becomes disabled or unable to pay premiums. You usually have to wait 6 months to qualify as disabled, and the insurance company will likely require a second opinion, depending on the situation.
- Accidental Death Benefits- This provides some multiple of the face amount in the contract in the event of an accidental death (also called “double indemnity” because it usually pays double the amount). It’s important to understand what your insurance company considers as accidental. Those who work in a dangerous work environment may consider this rider.
Term Life can “Ride” off Whole Life Insurance
Adding a term life insurance rider to a whole life insurance policy is done with the goal of keeping the whole life premium from rising. Adding term life will allow your death benefit to rise without a large increase in the premium. Let’s say, for example, you have a whole life death benefit of $200,000 and you add term life coverage in the amount of $300,000. Your total death benefit would be $500,000, but at a lower cost than bringing your whole life coverage up to $500,000. Research and compare the monthly premium with the total amount of coverage to decide if this method would work in your favor, rather than just stand alone coverage.
After reading about whole life and term life here, you should be able to make a rather informed decision about which insurance policy is best for you.