Your life insurance policy will protect your loved ones financially in the event that you pass away. It is an integral and fundamental component of a sound financial plan. With this, you can have peace of mind knowing that you can still provide for your family even if you’re no longer with them physically.

In the United States, you have two basic types to choose from: term life insurance and whole life insurance. In this guide, you’ll learn all about the former.

Contents

Key points

Here’s a rundown of the key facts you should know about Term Life cover:

  • It will pay out a death benefit to your beneficiaries when you pass away during the term.

  • It is the easiest-to-understand type of life insurance.

  • It costs less than the whole life type.

  • You can choose a term ranging from 1 to 30 years, or get a policy with an age-specified term.

  • Premiums vary from person to person, but someone shopping around for quotes in Hawaii may have rates similar with another individual (from the same group) in Idaho.

How Term Life insurance works

Also known as pure life insurance, term cover serves the sole purpose of insuring policy holders against the loss of life. And, as the word “term” already implies, it provides coverage for a set period of time. In other words, it comes with an “expiration,” and the decision of renewing it is up to you.

The amount of death benefit payout your beneficiaries will receive is the same as the value of the policy you purchase. So when you buy a $200,000 policy, the payout is of the same amount.

Note also that this is the simplest type of life cover, as it’s straightforward and doesn’t have a cash value or savings component. Just choose a value and term, and make your monthly premium payments.

What goes into your premiums

Your age, health status, and life expectancy influence your premiums. This is why you should purchase a police while you’re still young and healthy. The longer you delay, the more expensive your premiums will become.

Certain lifestyle habits, such as smoking, can also have a drastic effect on your expenditures. Being overweight or obese can also push your premiums up.

Break down: Get to know Term’s different types

When you opt for term life insurance, you’d have to make a more specific selection. This type of policy comes in two different kinds, namely: level term and decreasing term.

  • Level Term: With this, your coverage and protection lasts for a specified amount of time. Most people nowadays choose terms ranging from 10 to 30 years, although you can still opt for a one-year plan (known as the yearly-renewable term). How much you’ll pay towards your premiums depend on your age and health. Unlike other types of insurance though, once you purchase a policy, your premiums will stay the same throughout the life of the policy.

  • Decreasing Term: This type of term cover features an annually-decreasing death benefit. The reductions will continue until its predetermined date. You have fixed premiums though, so you don’t have to worry about sudden cost increases.

Before, the most popular choice was the yearly-renewable term. However, since premiums go up as one ages, it has the disadvantage of being difficult to maintain at an older age. This is why level-term policies have become the most preferred option.

Why Term Insurance may be the best option for you

There are many good reasons choosing a term insurance policy may be the best decision you can make. For instance, you should consider this type of coverage when you know for certain that your loved ones will already have stable finances even when you’re no longer there to provide for them, and you just want to make sure you don’t burden them with burial expenses. This might also provide you with a better option if your goal is to simply protect your surviving family members from temporary loss of income.

References:

http://money.cnn.com/retirement/guide/insurance_life.moneymag/index7.htm

http://www.iii.org/article/what-are-different-types-term-life-insurance-policies

http://money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2014/02/26/which-is-better-for-you-term-or-permanent-life-insurance

http://www.insureuonline.org/consumer_guide_life.pdf