Tag

Term Life Insurance

Browsing

Is Term Life Insurance Worth it? Before we dive into the term life insurance details, you should know why life insurance is important? Life insurance is a great investment for your loved ones when you die and it’s financial protection for them. When you die, your family or beneficiaries get the non-taxable amount.

For tax details check this out: Are Life Insurance Payouts Taxable?

What Does Term Life Insurance Mean?

Term life insurance, also known as term assurance or temporary insurance, is a type of life insurance that provides coverage for a specific period of time and at a fixed rate of payments. Basically, term life insurance works for a limited period of time or term.

After this term expires, the policyholder is no longer guaranteed the previous rate of premiums. Now the policyholder can either renew the policy or let it expire.

Generally, when you’re buying term life insurance, you need to have a close look at these three things:

  1. Initial or Face amount.
  2. Length of coverage.
  3. The premium.

How Does Term Life Insurance Work?

As the name suggests, term life insurance is effective for a specific period of time or term. These terms can be 5-year terms, 10-year term, etc.

When you buy a term life insurance, the insurer promises to pay a certain death benefit(amount) to the beneficiaries of your policy. The amount is paid only if you die during the policy’s term.

You pay monthly or yearly premiums for your selected term. Usually, term life insurance premiums cost less than whole life insurance premiums.

If you die within the policy’s term, the beneficiary would file a claim against the death benefit. After insurer’s detailed investigation process, the beneficiary gets paid in a lum-sum or annual payments.

What Does Term Life Insurance Cover?

As term life insurance covers you for a specific period of time. If you die within policy’s term, the following things are covered by your policy,

  1. End of Life Expenses: Including funeral and burial expenses.
  2. Day To Day Bills: Like utility bills, clothes, kids fee, etc.
  3. Mortgage: Term life insurance payouts can be used to pay the mortgage.

What Happens When Term Life Insurance Expires?

Here is the answer. As term life insurance works for only a specified period of time, so there comes a time when you outlay your policy. When term life insurance expires, you can keep your policy, convert it to permanent life insurance or let it expire.

1. Keep Your Policy

When your term life insurance policy comes to an end, you can keep your policy but this time you might be paying a higher premium amount due to age and health condition factors. If you’re in good health, you can also shop around and buy new term life insurance from another company. But remember, the age factor still plays its role in the premium cost calculation.

2. Convert To Permanent Life Insurance

You also have the option to convert your policy to permanent life insurance, if you want to remain insured for the whole life. Although permanent life insurance premiums cost higher than term assurance, it has a lot of other benefits as well. For example, it makes sure that the death benefit doesn’t expire for your loved ones or beneficiaries.

Types of Term Life Insurance

1. Level Term Life Insurance

Level term insurance is the most simple and basic type of term life insurance where the premium you pay for the policy remains the same during the specified period of time or during the term. It means the premiums you pay each year neither increases nor decreases during the term. This thing makes term life insurance an ideal choice for those who want to plan their budget ahead of time. Common level terms are 5-year term, 10-year term, 15-year term, 20-year term, and 30-year term.

2. Convertible or Renewable Term Life Insurance

In this type of term life insurance, the policyholder can convert the policy into another policy like permanent life insurance. If you convert your insurance policy during the term period, you don’t need to take another paramedical exam.

But remember, when you convert your policy into permanent life insurance, you will be paying a higher insurance premium each year. This type of insurance is ideal for those who want to remain insured/eligible for the whole life.

3. Decreasing Term Life Insurance

In this type of term life insurance, the death benefit keeps on decreasing each year while the amount of premium usually remains the same. If you die before the term expires, the beneficiaries get the amount left in your policy.

In term life insurance, the premium amount is usually less than term life insurance premiums. This type of insurance covers specific expenses(such as a mortgage or personal loan) for the death beneficiary.

Decreasing term life insurance makes sure that your debts are not passed onto your loved ones.

4. Increasing Term Life Insurance

Usually, death benefits remain the same in almost all types of life insurance. But in increasing term life insurance, death benefits increase each year. The premiums you pay each year also increase in this type of term life insurance.

These death benefits increase to a certain limit within 2% to 10%. If you’re thinking about long-term protection, then this type of insurance is not a good option because, at some point, the premiums may go higher than the death benefits.

Is term life insurance worth it?

Some people think term life insurance is just a waste of money because it ends after a certain period of time. If you don’t die within this time, the policy simply ends without paying out. Term life insurance policy is the best choice for you if

  1. Someone relies on you.
  2. You have debts.
  3. You want to be insured but within your budget (Term life insurance premiums cost less than permanent life insurance premiums).

Bottom Lines

Term life insurance is a good choice as it provides a large cover for small premiums. If you buy term insurance at a younger age, you would get more benefits. Because of age and health conditions are considered while calculating your premium. So, at a younger age, your premium is less than older age.

Picture Credit: Pixabay

What is Life Insurance?

Life insurance is basically a contract between you and insurance provider company where you pay regular premiums, and in return, the insurer pays a sum of money in case of specific incidents like upon the death of insurance policyholder. Not only death but other incidents like critical illness or terminal illness are also covered by the life insurance policy.

This contract mentions all coverage and limitations. Life insurance is the thing which is overlooked most of the time but trust me, it’s an important financial part of your life. Because it provides benefits for your family in long terms.

Typically life insurance is purchased so you that your family members would be able to live a balanced life and sustain their bills and education expenses for your kids because no one wants to leave their family unprepared.

Do I need Life Insurance?

If you’re married, have kids or if someone is dependent upon you in any way. Then the answer is “YES” because it covers both your family and your business.

But not everyone needs life insurance, it depends on many factors. The first question that needs to be answered when you want to buy life insurance is “Who you want to protect after you pass away?

After answering this question, you can choose one of the following life insurance plans.

Common Types of Life Insurance

1. Term Life Insurance

Term life insurance is for a specified period of time like 5 – 30 years. It’s a flexible type of life insurance, ideal and affordable for an individual who wishes to buy life insurance for a specified period of time like a person can buy term life insurance until his children reach adulthood. If the policyholder didn’t die within the insurance time period, the policy expires without any payout.

2. Whole Life Insurance

Whole life insurance, also known as permanent life insurance, is another simplest type of life insurance policy. It covers the whole life where you pay annual premiums. It pays benefits to the beneficiary after the death of the policyholder.

Whole life insurance premiums may increase as the policyholder ages and it can become hard to afford when the person lives after 80, but these benefits and premiums can be fixed in most cases. The younger you buy whole life insurance, the cheaper premium payments will be, because the amount, you agree to pay at a younger age, will be the same in 40 years.

3. Universal Life Insurance

Universal life insurance is a flexible type of Whole Life Insurance, it’s flexible because you can change the amount that you pay each year or even you can skip certain premium payments and death benefits are also adjustable. A part of your premium payment goes to your cash account and this cash account earns interest for you and cash value can be withdrawn or you can also take tax-free loans against your cash value.

But the universal life insurance policy is more expensive than a term life insurance plan.

4. Variable Life Insurance

Variable life insurance is another type of life insurance that is similar to the universal life insurance plan. The main difference between variable and universal life insurance is that with variable life insurance, the rate of interest will not be specific in your cash-value account. You can invest a portion of your premium into other investment plans like mutual funds or bonds.

With life variable life insurance, the potential for earning cash value is higher than other life insurance plans. But there is a risk of a drop in cash value earning when you invest in risky investment plans and your investments decline because these investments are subject to the market’s ups and downs. However, you’re still guaranteed minimum death benefits as long as you keep paying the minimum required premium regularly.

5. Mortgage Life Insurance

Mortgage life insurance, also known as Mortgage Protection Insurance, is a type of life insurance but here beneficiary is not your family or children, the mortgage lender is your beneficiary. This policy makes sure that your mortgage lender is paid and your family can stay in the home even after the death of the breadwinner.

In mortgage life insurance, the payout amount decreases over time and this is the biggest drawback of this life insurance plan.

6. Final Expense Life Insurance

Final expense life insurance, also known as Burial Insurance, is another type of life insurance that covers the expenses and bills (medical bills and funeral expenditures) that your family faces after your death. Unfortunately, this barebone insurance plan can cost thousands of dollars.

Disclaimer: This article provides only information about different types of Life Insurance plans. We don’t recommend you to buy any specific Life Insurance Plan, you should consult your insurance provider for further information.

Image Credit: Pexels

References:

https://en.wikipedia.org/wiki/Life_insurance
https://www.thebalance.com/compare-term-universal-variable-whole-life-insurance-1289668
https://www.protective.com/learning-center/life-insurance/types-of-life-insurance/