When it comes to purchasing life insurance, you can never do enough homework as the options can be dizzying. When I first started on my journey to purchase life insurance for the first time, I did not know where to start and couldn’t make heads or tails of the literally hundreds of options that are available. After working with countless brokers and pouring through the endless amount of websites that purport to offer real advice on Term Life Insurance, I thought it might be helpful to consolidate what I have discovered into a singular article to help others who may find themselves in the same position.
What Is Term Life Insurance?
In short, term life insurance is a policy that is purchased that expires after a set term. Whole life insurance policies on the other hand never expire as long as you continue to pay your monthly premiums. This subtle difference is a massive distinction when examined by the extreme number crunchers that set insurance premiums. If you are interested in a more in depth explanation of the differences between term and whole life insurance, this article by Forbes is one that I found particularly helpful during my search. At there core all insurance policies are the same, they want to minimize risk while at the same time increase profitability. What this means in terms of term life insurance is that providers offer a significantly lower rate for their services banking on the fact that you will not die during the life of the term. Whole life insurance providers on the other hand have to factor in that 100% of their customers will at some point die and they will have to pay out as long as the customer continues paying premiums. While there are several types of variable term life insurance available, they all operate under the same principle.
Different Types of Term Life Insurance Policies
In general there are three types of term life insurance policies, annual renewable term, level term life insurance, and return premium term life insurance.
- Annual Renewable Term: As the name implies, these types of life insurance policies are only guaranteed from a one year term and most policies will not insure you if you have a preexisting terminal illness or develop one during your policy term but do not die during the term. As a result this tends to be the least attractive and purchased option although the premiums advertised are significantly lower than any other form of life insurance. It is possible to find annual renewable term insurance policy if you have a pre existing condition terminal condition although you will find your options to be extremely limited and the premiums very high.
- Level Term Life Insurance: Most term life insurance policies purchased fall into this category. Level term life insurance policies insure an individual for a set period of time at a set premium rate, usually for 5, 10, 15, or 30 years. The longer the term the closer the premiums will get to whole life insurance but will still be cheaper than purchasing a whole life policy for the same amount of payout coverage.
- Premium Term Life Insurance: A premium term life insurance policy returns the premiums paid during the life of the policy back to the insured if the insured outlives the term of the policy. While the premiums on a premium term life insurance policy will be significantly higher than a level term life insurance policy, the assumed risk by you is also significantly lower. Most policies return a significant portion of the premiums paid at the end of the term so the only possibilities are that your policy ends up paying out or it doesn’t and you receive most of your money back.
Who Should Consider Term Life Insurance?
In general, term life insurance is ideal for people who have more than the average risk factors for death than others within their age category. For smokers, those that work in high risk industries, or people who are extreme adventure enthusiasts, term life insurance can offer you significantly lower premiums than you will find for any other insurance policy and are designed with you in mind. Similarly term life insurance can be a good investment to ensure your loved one’s will not have to financially struggle if the unthinkable were to occur prior to your building a solid retirement nest egg. If you’re currently 40, investing in a 20 year term life insurance policy could be a good option for example. If something were to occur before your 60th birthday you would have the reassurance that your family was taken care of. If nothing happens, by your 60th birthday you should have a considerable enough wealth of retirement savings that life insurance is no longer a viable investment. As with anything financial planning related the best first step is to talk to a Certified Financial Planner who can offer you specific advice based on your individual situation.