An easy guide to term life insurance
Term life insurance is the easiest type of life insurance to understand and often has the best value for consumers whose major expenses will disappear over time.
A guide to term life insurance
If you're in the market for life insurance, you may find yourself facing a dizzying array of choices. Should you get whole life insurance, or should you opt for term insurance? Then your insurance agent might start throwing around terms like "riders" and "convertibility." It's enough to make your head spin.
Relax. For many people just beginning to consider life insurance, one of the easiest policies to understand is term life insurance.
What is term insurance?
Term life insurance--sometimes referred to as "temporary" insurance--provides coverage for a specific period of time. That term can run from one to 30 years, but the most common period is 20 years. If the insured individual dies during that period, beneficiaries receive the life insurance benefit.
Generally, term life insurance provides the greatest amount of insurance protection for each premium dollar. If you have expenses or financial obligations that will disappear over time--such as your child's college education or a mortgage--term life insurance may make sense for you.
What are the advantages of term life insurance?
People typically buy term life insurance because it's cheaper than other types of life insurance policies and it provides a lump payment to beneficiaries. Unlike whole life insurance policies, term life insurance doesn't accumulate cash value (the savings portion of a permanent life insurance policy). Term insurance is pure life insurance coverage, so premiums are usually lower and remain constant throughout the duration of the policy.
Term life insurance coverage plus a few extras
Although many term policies just offer life insurance protection, you can buy term insurance with extras. These extras are called riders, and they can alter your policy's coverage or terms. For instance, some life insurance companies offer a return of premium option. If you had a return of premium feature on your term policy, the life insurance company would refund your premium payments when the policy expired. While it may be beneficial to have your payments returned at the end of the term, the premiums for these policies are typically 20 to 30 percent higher than standard term life insurance policies.
Another type of term policy add-on is a convertibility clause, which allows you to convert your term policy into a permanent policy without having to undergo a medical exam. This is a valuable feature because some people find that they still have a need for life insurance after their term policy expires. In such a situation, having the opportunity to convert your term policy to a permanent policy would be beneficial.
Purchasing the right amount of term life insurance
According to the Massachusetts Office of Business Affairs and Regulation, there isn't a precise way to determine exactly how much life insurance coverage you should purchase. However, there are many different calculation methods out there to help you find the right amount of coverage. You could use a life insurance calculator, or one simple method estimates coverage to be 10 times your annual income.
Whichever formula you ultimately decide to use, be sure to buy enough life insurance to cover financial obligations and provide income for your loved ones for several years. Buying enough life insurance may help to ensure that your spouse, children or other dependents are not left with an overwhelming amount of debt should your income suddenly evaporate.
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