How Does Term Life Insurance Work?

Term Life Insurance

Term life insurance is a great, cost-efficient way to protect your loved ones from the worst case scenario. Even though term life insurance won’t give you as many options as permanent life insurance, it is a budget-friendly alternative.  Term life insurance is a promise from the insurance company to pay your beneficiary or beneficiaries the death benefit state in the policy if anything were to happen to you. This pact for compensation is essential for protecting your family’s livelihood, and it pays for you to know how term life insurance policies are constructed.

The Basics

Term life insurance policies will all look similar on the outside regardless of what insurance company provides you with the policy. All will have payments to the insurance company called premiums, these payments may be paid monthly, quarterly, semi-annually, or annually. The contract will have a coverage period, which is the amount of time that the insurance company is going to provide life insurance to you. The popular time periods in the industry are 10 year, 20 year, and 30 year term periods, however, you can obtain contracts for different time periods if you would like. Additionally, they have a death benefit for your beneficiary(s), which is the amount that your family and loved ones will receive if you die during the coverage period. For example, say a married couple just had their first child, a popular coverage that they select is a 20 year term period.  This period in all likelihood will cover their new family and child up until their child is just about through their college years. 

One important thing to note about this death benefit is that the amount of coverage is going to transfer to your beneficiary or beneficiaries tax-free. Furthermore, term life insurance policies tend to be much cheaper than whole life policies, however, they do not offer a cash value aspect like permanent life insurance policies do. 

What is a Term Life Insurance Rider?

Although term life policies are popular because they are cheaper and far simpler, their costs from one another can differ because of how large the death benefit is, how long the coverage lasts, and if there are any additional riders that are included in the policy.  One such rider that is popular in term life insurance policies is a term conversion rider.  This rider also you to convert your term life insurance coverage into permanent life insurance WITHOUT being medically underwritten again.  This option may be of great importance if you were to suffer a medical issue that would render you no longer insurable in the eyes in the insurance company.  

Shortcomings of Term coverage

Term life insurance has some shortcomings that can turn into traps if you aren’t prepared to compensate for them. One of which is term life policies cannot be adjusted while active. So if, for example, you were to find out that your death benefit is not sufficient for your family’s comfort, you would need to apply and be medically underwritten for an additional policy if you would like to increase the amount of insurance coverage. Another concept to understand is that term life policies are calculated by life expectancy and health. When you are older, your life expectancy drops and that means your following term life policy will be more expensive. Longer isn’t always better for you first term life insurance policy since you could be setting yourself up for paying more than you should be later.

Steps to take

Speaking with different insurance companies and financial advisors is fundamental in ‘shopping around’ for term life insurance. You’ll be offered different deals that could vary significantly by the numbers from different insurers. With all these options presented to you, it’s important that you do your homework on them and see which will best compliment your financial lifestyle. How much you owe in debts, your dependent’s needs and your spending habits are all going to shape your decision. Find a financial advisor to plan out what and how you can add a term life insurance premium to your expenses.

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