Term life insurance, whole life, and universal life insurance plans have their unique benefits and drawbacks that should be considered when you are shopping for life insurance coverage.
Term life insurance:
It is the simplest and one of the most affordable insurance plans. It provides coverage for a specific period, usually 10 or 20 years, and pays out a death benefit if the policyholder dies during that time.
Policy term- 5, 10, 20, or 30 years.
Investment component– None
Pros- Inexpensive and provides better death benefits than whole life.
Cons- There’s no death benefit if you outlive your policy term.
Whole life insurance:
It is more expensive than term life insurance, but it offers lifelong coverage and includes a savings component.
Policy length-Until the death of the insured.
Investment component- Builds cash value during the policy term.
Pros- Guaranteed death benefit to the beneficiaries, and it does not require monitoring.
Cons- More expensive and provides smaller death benefits than a term life insurance plan.
Universal life insurance:
Universal life insurance is similar to a whole life insurance plan. It is more expensive than term life insurance, but it also offers lifelong coverage.
Policy length: Until death
Investment component: A specific amount for your premium is invested in assets like stocks and bonds that can be adjusted. It also builds cash value and can be used to pay for premiums.
Pros- Guaranteed death benefit, flexibility with premiums, and cheaper than whole life insurance
Cons- It may require a medical exam; the cash value isn’t guaranteed.
What are the benefits of term life insurance?
Here are some reasons why term life insurance might be a good fit for families on a budget.
Less expensive: Term life insurance is the perfect option for most people because it offers extensive coverage at an affordable rate.
Easy to Understand: Term life insurance is an important part of any financial plan because it provides a death benefit to your beneficiaries if you die within the policy term, as long as you pay the premiums.
Flexibility: There are many options when it comes to choosing how long your term life insurance policy should last. You can choose to buy a policy for one to 30 years.
Death Benefits are tax-free: The term death benefit is tax-free, so the beneficiary will get to keep the full amount without worrying about taxes.
No Penalty or cancellation fees: You can cancel your term policy without incurring any fees or penalties.
What happens if I outlive my term life policy?
Your loved ones won’t receive any death benefit when you die if you outlive your term policy. Surviving your policy is one reason some people may shy away from term life.
There is an option — return-of-premium term life policies will repay you the amount you paid in for coverage at the end of the term. However, those plans cost much more than regular term life policies. You’ll have to weigh whether the extra cost is worth it — it may very well be if you get your money back at the end.
Medical exam for term life insurance vs. no medical exam life insurance
A medical exam may be required when applying for a standard term life insurance policy. The exam will cover your height, weight, medical history, smoking habits and include a blood and urine test. These tests will look for specific medical problems.
The results may hinder you from getting approved for insurance or you may wind up with much higher rates depending on the outcome. If you have health issues insurers would find high risk, such as diabetes , high blood pressure , cancer or other pre-existing conditions , you have options:
- Look for a “no medical exam” term life insurance policy, known as guaranteed issue term life insurance.
- Consider simplified issue life insurance. You don’t have a medical exam, but you answer a handful of health-related questions.
- Find insurers that provide diabetes life insurance. John Hancock, Lincoln and Prudential offer life insurance for diabetics.
- Buy convertible term life insurance. You can convert your term life policy to permanent life insurance without having to answer health questions.
How COVID-19 is affecting life insurance medical exams
You’ve already learned that the best time to buy life insurance is now while you’re younger. There’s another good reason to buy life insurance now — the COVID-19 pandemic. Some insurers aren’t requiring medical exams at this time.
Raymer Malone, certified financial planner and owner of High Income Protection Insurance Agency, says, “Some carriers have increased their ‘no exam’ limits, allowing for larger policies to be purchased without needing a medical exam.”
When term life insurance may be good for you
Term life insurance is the simplest type of life insurance to get and it’s become even easier to get approved these days.
Insurance companies are offering term life insurance products today that speed up the underwriting process and may not include a medical exam for policies within a certain benefit amount and for a person under a specific age, say 50 years old.”
The biggest difference between term life and permanent life is that term life covers you for a specific period. Permanent life stays with you no matter your age, as long as you pay the premium.
Here’s a look at the differences:
| Parameter | Term life | Permanent life |
|---|---|---|
| Length of time | Term life is for a limited time — often 10, 15, 20 or 30 years | Lasts your whole life |
| Premiums | Often less expensive than permanent life | Usually more expensive |
| Cash value | No cash value | Accumulates cash value, so you can tap into the policy if needed |
| Conversion option | Term life policies often let policyholders convert to permanent life | You can’t convert from permanent life to term life |
Term life is usually the more affordable choice, but make sure you understand term life’s downsides. That includes not building cash value and losing coverage once the policy ends. Losing your policy means you’ll need to make sure you have other ways to fund final expenses and any other outstanding debt like a mortgage and college bills.
Here’s when buying a term life policy would likely work better for you:
- You don’t have much money to put toward life insurance.
- You want to make sure your family gets protection through your middle-aged years. A 20-year policy could take you through your most productive years.
- You want to maximize a potential benefit. Term life often pays out more for less money than permanent life. The downside is you can outlive a term life policy. You may have the option to convert to a permanent life policy near the end of your term life policy, though.
When deciding how much life insurance you need, think about:
- Funeral costs
- How much it will cost to replace your income
- The services that you provide your family, such as child care
- Your outstanding debts, such as mortgages, credit card bills and loans
- Long-term financial commitments, such as paying for your child’s college
You can start figuring out if you need extras or riders on your policy once you know what your family might need financially.
Term life extras and riders
Term life policies can include extra features or riders. For example, your policy may consist of an accelerated death benefit. This type of rider lets people who are terminally ill, have a chronic illness or in long-term care tap into life insurance, while still leaving your loved ones with the remaining life insurance benefits.
You may also receive a disability waiver of premium, which grants you a waiver on paying your premiums if you’re disabled for at least six months.
And some policies offer double or triple the payout if the death is an accident.
What riders are available with Term life insurance?
Here are common term life riders:
- Accidental death– As you might expect, this rider pays out more money if you die in an accident. By getting this rider, you usually double the payout. So, let’s say you have a $250,000 term life policy with an accidental death rider. Your family would get $500,000 if you die in an accident.
- Family income benefit– This rider will provide income in case of the death of a family member. Let’s say your spouse dies. You no longer have that income, so making mortgage payments may become difficult. This rider provides funding to help you in that situation.
- Guaranteed insurability– This rider lets you add onto your policy without going through a medical exam later. You may find that you need a larger policy. If you have this rider, you won’t have to go through an exam before the insurer expands your policy.
- Long-term care waiver– The rider helps if you need long-term care in a nursing home or home care. There are also separate long-term care policies, which are called combination life insurance.
- Waiver of premium– The rider waives your premium if you become totally disabled or you lose your income because of injury or illness.
There are many term life rider options, but you’ll want to consider whether the riders are worth it.
How to buy term life insurance?
When shopping for the best life insurance company, there are three steps to help you along:
1. Find the top life insurance carriers
We search Americans best life insurance companies, to compare insurers and rates. We also look into their life insurer’s financial strength, customer service, value, website to determine if we would recommend the company.
2. Check their financial stability
As mentioned above, we look into the insurer’s financial stability. There are financial stability ratings from agencies such as Moody’s, S&P Global, A.M. Best and Fitch where we can review to get an idea of the company’s strength. These ratings are important — the better the grade, the more likely they’ll be around to pay your policy out in 20 or 30 years.
3. Check your Advisors background
An excellent choice to research the background of your financial advisor is FINRAs BrokerCheck or the Securities and Exchange Commission, (SEC) AdvisorCheck.
5 Ways to save on term life insurance
1. Shop around
Most insurers allow you to get a quick quote through their website. Get quotes from multiple life insurance companies and compare term life insurance rates to find the best deal.
2. Plug in different values
Compare how the cost of the policy changes by adding or removing money from the death benefit amount or changing the term. If the savings are considerable, you may find it’s better to adjust your original plan.
3. Check with your employer
Many companies offer life insurance. You may save on the cost of term life insurance through a group plan and you won’t have to go through a medical exam. Make sure to review the fine print and limitations to confirm a group plan is the right choice. You may find an employer’s life insurance isn’t enough but may work well as a supplement to your individual policy.
4. Quit smoking
Did you look at how much term life insurance costs for a smoker in the table above? The cost of term life insurance doubles if you’re a smoker. Consider quitting before you apply for term life insurance. Quitting could save you money and extend your life expectancy.
5. Stack term life insurance
If you need a larger amount of life insurance, it can get pricey. There’s a clever way you may be able to save on the premiums. Paul McIntyre, Chief Compliance Officer for NAMCOA® – Naples Asset Management Company®, LLC, suggests stacking term life policies.
According to McIntyre, “a $2,500,000 30-year level term policy for a preferred male, age 35, would cost $223.56 per month. They could stack their policies for added savings.”
McIntyre outlines what happens if you purchase five policies instead:
- $500,000 10-year policy — $21.88 per month
- $500,000 15-year policy — $26.69 per month
- $500,000 20-year policy — $32.38 per month
- $500,000 25-year policy — $43.75 per month
- $500,000 30-year policy — $48.56 per month
“This still provides a current death benefit amount of $2,500,000 that is needed for a cost of $173.26 for a savings of just over $50 per month. This is an extra $50 that you can now use towards your financial plan,” McIntyre says.
Plus, you’ll have the highest amount of coverage in your middle-age years, when your expenses and debts are likely at their highest.
Choosing term life insurance
Term life insurance is a good financial move if you have loved ones who rely on you. You can buy term life insurance policy for a set amount of time and if you die during the coverage period, your loved ones receive a cash lump sum, tax-free.
Consider term life insurance if you own a home you’re paying off, are the sole breadwinner, have debts you don’t want to leave your loved ones saddled with or have kids you want to make sure can afford to go to college. The amount you leave behind can help your loved ones meet their financial goals.
Term life insurance isn’t as expensive as many people believe. Furthermore, it’s less expensive to get when you’re younger, so don’t delay in insuring yourself and leaving a legacy for your loved ones.
FAQ’s: Term Life Insurance
Is Term life insurance worth it?
Yes. Term life insurance is worth it if you have loved ones who rely on your financial support — like partners, children, or siblings.
How much does term life insurance cost per month?
Term life insurance costs $53 per month, based on a rate analysis by Insurance.com. However, certain factors significantly increase or decrease your rates, such as your age, policy length, and health status.
How Long Does Term Life Insurance Last?
A term life insurance provides protection for a set time, typically 10, 20, or 30 years, and pays out a death benefit if the term life policyholder dies during that time.
What to do when your term life insurance expires?
Here are a few things you can do when your life insurance policy expires: –
Buy annual renewable term life insurance- You could choose annual renewable term life insurance instead of buying a new policy for five or more years. This way, you can decide each year if you want to keep your coverage or not.
Convert it to a permanent life insurance policy- Term life insurance is usually better for most people, but permanent life insurance has some advantages. Permanent life insurance lasts until you die, but it costs more than term life insurance.
Buy another term life insurance plan- Buying another term life insurance policy is a smart option for most reasonably healthy people with obligations like mortgage payments or dependents. However, it might cost you more for a term life insurance plan, but if you buy shorter terms, say 5 or 10 years, it will help reduce the cost.