What is term life insurance?

Term life insurance can best be thought of as renting life insurance.  It does expire, or terminate, but the monthly cost of the insurance is usually lower than that of whole life.

Term life is really beneficial when you are young, still working, and can be expected to supply an income for many more years.  In this instance, term life insurance is covering the cost of you not being there to provide for your family.

Life all life insurance, you make payments on a set schedule and if you die, your family is given money.  The amount of money you pay, how often you pay, and for long the policy last for before terminating will be determined when you set up policy.

How much term life insurance should I have?

I like to use what is called the DIME method.  DIME stands for Debt Income Mortgage Education.  There are other ways and you can read about them here.

Are there different types of term life insurance?

Yes!  When people think of term life they are actually thinking of what is called a Level Term, or Fixed Term.  This is where the amount you pay each month and the death benefit remain the same, or is fixed.

But sometimes you can have what is called a decreasing term.  This is a policy where the amount of money that is paid if you die (called a death benefit) decreases over time.  These policies are usually purchased to cover a debt and are designed so that by the time the policy expires the debt is already paid off through monthly payments.

There are policies called Yearly Renewable Term (YRT) Policy.  With most term insurance, once the policy reaches its expiration date you will need to go through the process of buying a new one, and this can include needing to go through underwriting.  With a YRT policy, you are given the option each year to renew.  While your premiums may go up, you will still be considered guaranteed renewable, which can be a blessing if your health takes a turn for the worse.

Term vs Whole

The main differences are the duration of the policy, the accumulation of cash value, and the cost.  Which is right for you is up to you and your family.

Premium Cost

The premiums on term will almost always be less than with whole.  This is one of the defining features of a term policy, the low month payments.  With those low monthly payments however, you also have an expiration date on your policy and you have not cash value.

Availability of Coverage

When you buy a whole life policy you do so knowing that you will have it forever.  With term insurance, there will come a time when you need to apply for coverage again.  As our bodies age, our health declines.  This in turn causes out monthly premiums to go up.  A 20 year $500,000 term policy that you bought at 20 is going to cost a lost less than the same policy you buy at 45.

In the same note, deciding that you want whole life insurance at 20 will cost you a lot less than the same policy purchased at 65.

Investment Value

Term life insurance has no cash value.  If you stop making payments or if the policy expires, no money will be given back to you like with a whole life policy.  Many people feel that whole life is better for this reason.

Personally, I feel that life insurance should NEVER be considered a way to invest.  There are almost always better ways out there to grow your money that to give it to an insurance company.

Term vs Convertible Term

Convertible term is a type of term life insurance policy that has a rider added to it that give you the option to convert the policy into a whole life policy at a certain time.  It will be expensive, but you can sometimes get the best of both worlds without needing to go through underwriting at an age where you may be rated less than favorable.

Which is better, term or whole?

This depends on the person and the situation.  They have very different purposes and what you’re wanting to protect will determine with type is best for you.


1 thought on “What is term life insurance?”

  1. Pingback: When you shouldn't buy life insurance - Cook Insurance Brokerage

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