Life insurance can provide for your family financially if you pass away and are unable to take care of them. Your dependents can use life insurance funds for various things, including funeral costs and other final expenses, debt payments, college costs and regular living expenses.
If that’s your only goal, you may want to consider term life insurance. Understanding how term life insurance works and what its benefits and drawbacks are can help you determine if its the right choice for you.
The Different Types of Term Life Insurance
Commonly dubbed “pure life insurance,” term life insurance is designed to offer only a death benefit if you pass away during your term. There’s no cash value component like there is with permanent insurance, so you’re paying for just the insurance.
But depending on your goals, you may want to consider more than one type of term insurance before you buy. Here’s a breakdown of each.
Level-Term Life Insurance
With this policy, your monthly premiums and death benefit stay the same throughout the life of the policy. It’s simple and generally affordable.
For example, a healthy 30-year-old man could pay as little as $16 per month for a 20-year level-term policy with $250,000 worth of coverage. The longer the term, the more expensive the policy is.
Level-term life insurance is best if you want predictability. You know what you’re going to get both now and years later when the term is almost up.
Decreasing-Term Life Insurance
Another common form of term life insurance, a decreasing-term policy, has a set term, but with a decreasing death benefit. The premiums stay the same, however.
The most common use case for decreasing-term life insurance is in conjunction with a mortgage or other major debt. The idea is that you can use the policy to pay off your debt if you die before you’re debt free. But because your debt decreases over time, so does the policy’s death benefit.
If you need coverage for more than just debt, however, this isn’t a great option.
Increasing-Term life insurance
This type of policy also has a set term but includes a schedule by which both your monthly premium and death benefit increase over time.
While increasing-term life insurance is rare, it might be worth considering if you’re young and don’t have a lot of room in your budget. The assumption is that you’ll earn more money in time and be able to afford the higher premiums later on. Most of the time, it is easier to qualify for life insurance when you are younger and healthier. Increasing-term life insurance can be a way to ensure coverage early in life, while maximizing potential benefits as you age.
Annually-Renewable Term Life Insurance
With an annually-renewable policy, you can renew your policy every year without providing proof of insurability.
The term on this type of policy can be longer than what you’d get with a level-term policy. For example, some insurance companies sell a policy called “Term 80,” which lasts until you’re 80 years old, regardless of when you get it.
Premiums for annually-renewable term insurance typically start off lower than what you’d get with a level-term policy. But the premiums catch up over time and eventually become much more expensive.
So, if you want cheaper coverage now, this might be a good choice. But don't hold onto it for too long. Otherwise, you might end up with expensive coverage.
Return-of-Premium Term Life Insurance
This policy functions the same as a level-term policy, but with a twist. As you already know, with a typical term life insurance policy, you don’t get any money back when the policy expires.
But with this policy, you receive all the premiums you paid throughout the life of the policy at the end of the term. Because the insurance company is taking on more risk, though, monthly premiums tend to be much higher than a typical level-term policy.
So, if you’re confident that you’ll outlive your policy, and you can afford a higher premium, this might be the way to go.
Is Term Life Insurance Right For You?
Term life insurance is typically the best choice for the majority of people. It’s much less expensive than permanent insurance and gives you and your loved ones the protection you need.
To understand which type of term insurance is best for you, take a look at your situation, and shop around to see what kind of quotes you can get. You may also contact our licensed insurance agents for a free quote and consultation. The more research you do, the easier it will be to find the best policy for your needs.