Term Life Insurance
Term Life Insurance Explained: What You Need to Know
Term life insurance is exactly what it sounds like – life insurance that covers you for a set term, be it 5, or 30 years. Term life insurance is a popular choice for young working adults who want to protect their families in case anything happens to them. If you die unexpectedly during the insurance term, the beneficiaries will get a large sum from the insurer. Before choosing to invest in term insurance, it helps to know what you’re getting into and what the benefits of this life insurance type include.
In this article, we outline everything you need to know about term insurance, including how it works, its benefits, how it compares to permanent life insurance, and how to choose the right policy.
What Is Term Life Insurance?
Term life insurance refers to a temporary life insurance policy. While permanent life insurance will remain active until you die, term life insurance has a set expiration date. No matter how much you’ve paid over time, once the term runs out, your beneficiaries will no longer get the lump sum, known as the “death benefit”. The key features of term life insurance include:
- Death benefit: All life insurance offers a death benefit. This refers to the amount paid to your beneficiaries after death. This sum varies considerably, depending on the amount of coverage, your age, and your income.
- Defined coverage period: Term life insurance covers a pre-set period. For example, if you have a young child and want to protect them in case something happens to you, getting a 20-year premium may be all you need until they are self-sufficient and no longer reliant on you.
- Level premiums: Most life insurance premiums remain level for the term duration. Keep in mind that the monthly payments are calculated with the future in mind and to ensure that the insurer is sufficiently compensated during the term.
- Riders: A rider is a policy add-on. You can stipulate special conditions and requirements, such as an “accidental death rider” which pays out an extra amount in case you die in an accident.
- Renewability: If you get to the end of your life insurance term, you may be able to renew your policy to keep your coverage. However, your premiums may increase. There are sometimes riders you can add to your initial policy to ensure you can renew your insurance if necessary.
- Cheaper premiums: Since you may outlive your insurance term, these premiums are usually more affordable than permanent life insurance. The limited time frame also contributes to the lower cost.
The comparatively lower costs and the policy add-ons of term life insurance make this a popular life insurance choice. However, as you get older, term life insurance becomes more expensive. For example, if you start your policy at age 30 you might pay only $13 a month, whereas at age 70, it’s closer to $170 a month.
Summary Table
The table below summarizes the main features of term life insurance and how it compares to permanent life insurance.
| Feature | Term life insurance | Permanent life insurance |
|---|---|---|
| Duration | Fixed term (e.g., 10, 20, 30 years) | Lifelong coverage |
| Premiums | Generally lower, fixed | Higher, but can be fixed or variable |
| Cash Value | None | Accumulates over time |
| Convertibility | Often possible at the end of the term | Not applicable |
If you have specific and time-bound insurance needs, term life insurance holds up well compared to other insurance types.
How To Choose Term And Coverage Amount For Life Insurance
Choosing the right term and coverage isn’t always easy. Consider the following factors before making a decision:
- Single-life or first-to-die: When looking for term life insurance, consider whether you only need coverage for yourself or if your partner should be included in the same policy. If you both work and contribute to household income, having a first-to-die policy can cover either one of you if the other dies.
- Cost over time: Do the math and see if the cost over time will be worth the expense, especially if the money may be better spent on an emergency fund or high-interest savings account.
- Health: If you’re sick or struggle with a chronic illness, it can be harder to find affordable term life insurance.
- Good benefits/extra features: Check to see how customizable the policy is, particularly which policy riders you can add.
- Financial obligations: If you have any debts, long-term goals, or family obligations, these may factor into your final insurance decision. Check out the following section to learn how to include these obligations in your final coverage.
How Much Insurance Coverage Do You Need?
Generally life insurance coverage is anything between $2500 to over a million, depending on your preferences. However, there is a method to determine exactly how much cover you’ll need so you can afford the premium costs and still get a comprehensive policy. Consider the following:
- Outstanding debts: If you have outstanding debts, the death benefit should be able to cover this. Calculate based on the maximum outstanding debt you might have during your term.
- Family situation: If your family relies on your income to live, the cover should be enough for at least 3-6 months of living expenses.
- Future plans: If you want one of your children to go to university, and worry that they won’t achieve this dream without your help, adding a university fund to your life insurance can help them pursue this even if you’re no longer around.
- Funeral costs: Funerals can be expensive. If nothing else, your life insurance can help cover the cost of a funeral so your family has one less thing to worry about.
Before deciding on your final coverage, add up all the expenses your beneficiaries may encounter in your absence. If the final premium is too expensive, work within your budget but try to find something that will still cover the most basic expenses in the event of your death. You’re trying to find a balance between comprehensive cover and value for money.
If you’re unsure where to start your calculations, consider using an online tool, such as Sun Life’s insurance calculator.
How to Apply for Term Life Insurance
Once you know how much coverage you’ll need, and how long your ideal policy length is, you can apply for life insurance. This is usually easy to do online, but will still require preparation and proper documents. The general steps to apply for term life insurance include the following:
- Prepare Documents: Make sure you have copies of your personal ID, proof of address, financial records, financial information, and your beneficiary information.
- Medical and lifestyle disclosure: Insurers need comprehensive details about your health, including past medical history, current medical conditions, current medications, and lifestyle choices, such as smoking, criminal activities or exercise. If you’ve had any recent medical tests or exams, mention them as well.
- Financial review: Insurers may evaluate your financial background. This includes income, current debts, existing insurance, and other financial commitments. This information helps calculate premium rates.
- Beneficiary information: Your insurance will want to know who your beneficiaries are, how the lump sum must be distributed (if there is more than one beneficiary), how to contact and pay your beneficiaries, and backup beneficiary information in case the primary beneficiary can’t receive the death benefit sum.
- Coverage information: You’ll be asked how much coverage you want to purchase.
The Underwriting Process
After you submit the application, the insurer will verify the information and decide whether to finalize your application. You’ll be sent a policy document with terms, and you can check to ensure it’s what you’re looking for. You can consult with an insurance advisor at this stage to help iron out any details and make final changes.
Once you’ve completed everything, you’ll pay a premium that’s been carefully calculated to consider term length, coverage amount, and personal factors like age, health and occupation.
Final Thoughts
With careful planning and some research, term life insurance doesn’t have to be yet another financial burden. Rather, it’s a safety net for your family (or other beneficiaries) to help them cope without your financial support for as long as necessary. Nobody wants to imagine what will happen to their loved ones if you pass away unexpectedly, but life insurance is an easy and relatively affordable way to make sure you’re always there for them, even if something happens to you.
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