Term Life Insurance: Understanding How Term Life Insurance Works
Key Takeaways
Term Life Covers a Set Period and Pays Out Only If You Die During That Term
You choose a term (typically 10, 15, 25, or 30 years), pay fixed premiums, and your beneficiaries receive a death benefit if you pass away during the policy period. If you outlive the term, the policy expires with no payout. You can then renew, convert to permanent life insurance, or let coverage lapse.
It's the Most Affordable Type of Life Insurance
Term life costs less than whole life insurance because it covers a defined period and has no cash value component. Your premium is based on your age, health, life expectancy, and lifestyle at the time you purchase the policy. A no-medical-exam option may also be available, replacing the exam with detailed health and lifestyle questions.
Size Your Policy Around the Income and Debts Your Family Would Need Covered
Calculate how many years of lost income your beneficiaries would need to replace, then factor in your mortgage balance, outstanding debts like student loans or car payments, children's college expenses, and funeral costs. That total is your starting point for the right coverage amount.
What is term life insurance?
Term life insurance provides coverage for a specific time period and pays benefits if the insured's death occurs during the policy period. Policy periods are usually 10, 15, 25, or 30 years. The policy premiums must be paid timely to keep the policy in effect.
Who is covered by term life insurance?
A term life insurance policy covers a person known as the insured. If the insured's death occurs during the policy period, the people who will be paid if the insured dies are called beneficiaries. These beneficiaries are named in the policy. In many cases, these are people who financially rely on the insured. There can be one or more beneficiaries named in a term life policy.
Why do you need term life insurance?
Term life insurance provides financial help to the beneficiary. Often this money is used to replace income that's lost as a result of the death of the insured. The benefit can also help pay bills, future expenses, and even burial costs.
How does term life insurance work?
Term life insurance is popular for its simplicity, affordability, and the financial security it offers over a specified period. Here's how it works:
Choosing a Term: The first step in acquiring term life insurance is selecting a time period—or term—for your policy. This term usually ranges from 10 to 30 years, depending on your specific needs and financial goals.
Premium Payments: Premiums are paid monthly, quarterly, or annually for the duration of the term. These premiums are typically fixed, meaning they remain constant throughout the term of the policy.
Death Benefit: The primary purpose of term life insurance is to provide a financial safety net for your loved ones in the event of your death. If you pass away during the policy term, your insurer pays out a death benefit to your designated beneficiaries. This benefit amount is the sum for which you were insured, and your beneficiaries can use the money however they want; including but not limited to, covering various expenses, such as paying off outstanding debts, covering ongoing living expenses, or funding educational costs.
Term Expiration: If you outlive the term of the policy, there is no payout. Once the term expires, the coverage ceases, and the policyholder is no longer protected. When this happens, you can opt to renew your policy for another term, convert it into a permanent life insurance policy, or let your coverage lapse.
Conversion Options: Some term policies offer a conversion rider that allows you to convert your term life insurance into a permanent life insurance policy without a medical exam. This conversion option provides flexibility and continuity of coverage, however, premiums for permanent life insurance are typically higher than those for term policies.
What are different types of term-life insurance?
There are several different types of term life insurance policies designed to meet your specific needs and preferences, including:
Level Term Life Insurance: This is the most common type of term life insurance. The death benefit and premium remain constant throughout the duration of the policy term. Terms typically range from 10 to 30 years, providing stable coverage and predictable premiums over the chosen period.
Decreasing Term Life Insurance: Unlike level term insurance, decreasing term life insurance has a death benefit that decreases at a predetermined rate over the policy's lifetime. This type of policy is commonly used to cover specific financial obligations that decrease over time, such as a mortgage. As the outstanding debt decreases, so does the coverage amount.
Increasing Term Life Insurance: In contrast with decreasing term life insurance, this type of policy has a death benefit that increases over time to keep pace with inflation or growing financial responsibilities. As the coverage amount grows, premiums may also increase to reflect the higher risk associated with the rising death benefit.
Annual Renewable Term (ART) Life Insurance: ART life insurance allows policyholders to renew their coverage each year without proving insurability. However, premiums for ART policies increase annually based on the policyholder's age at renewal. While ART can be suitable for those needing short-term coverage, it may become costly over time.
Convertible Term Life Insurance: Convertible term life insurance allows policyholders to convert their term policy into a permanent life insurance policy, such as whole life or universal life, without undergoing a medical examination. This feature offers flexibility, allowing individuals to adapt their coverage as their life circumstances and insurance needs change.
Each type of term life insurance serves different financial strategies and planning needs, so choosing the right one depends on your personal circumstances and what you hope to achieve with your policy.
How much term life insurance should you purchase?
As the insured on a term life insurance policy, you can select an amount that meets your needs. The amount needed usually takes into account providing for someone if you pass away. If small children will be the beneficiaries, you may want an amount that would cover your lost income for the number of years until they turn 18 or graduate from college.
Some other items to consider in the amount of the policy include:
- College expenses for children
- Mortgage on a house
- Outstanding debt (student loans, car notes)
- Funeral expenses
The GEICO Insurance Agency and our partners can help you get a policy that meets your needs. Get a life insurance quote online.
What are the benefits of term life insurance when compared to whole life insurance?
Term life insurance is usually a less expensive option compared to whole life insurance. This is because term policies are for a set time and amount that will be paid. If the insured is still alive at the end of the policy period, the policy expires and has no value after expiration.
How much does term life insurance cost?
The cost of a term life policy is based on the amount of the coverage and the insured's:
- Age
- Health
- Life expectancy
- Other lifestyle hobbies, employment, etc.
You may be eligible for a No-Med Exam policy. Instead of a medical exam, this option asks a few detailed health, financial, and hobby questions.
If the policy term expires and the insured is still alive, the policy can be renewed. The premium for the new policy would be recalculated with the insured's current age, health, and life expectancy along with the desired death benefit.
