Life Insurance Doesn’t Have to Be a Lifelong Commitment—Here’s Why
May 4, 2021
A common misconception about Life Insurance? The longer you have it, the better off your loved ones will be. The truth is though, Life Insurance doesn’t have to be a lifelong commitment. Depending on your needs, it might actually be smarter for you to insure during the years when it really matters, like your prime earning years, when your kids are young, or when your mortgage is at its highest.
That’s where Term Life Insurance comes in. A Term Life policy only covers you for a set period of time, but it’s a simple, straightforward, and budget-friendly solution that’ll help you plan ahead while still guaranteeing protection for your family. Read on to learn more about the basics of Term Life Insurance, how it works, and why it might be the right coverage for you.
What's Term Life Insurance?
Term Life Insurance is a type of Life Insurance that covers you for a predetermined period of time. Term life policies are usually available for a series of 10 to 40 years or until you reach a certain age, like 65 or 70. Some companies may even allow you to choose your own term length to meet your specific needs.
How does Term Life Insurance work?
If you pass away during the term, your beneficiaries will receive a tax-free payment known as the death benefit. The exact amount of money they get depends on how much coverage you buy, but once it’s paid out, your beneficiaries can leverage it in whatever way best fits their needs.
Some people use the money to pay for funeral arrangements or estate fees, while others put it towards their mortgage. In most cases, the death benefit is used to settle debts, pay for childcare, and fund college tuition, utility and grocery bills and other day-to-day living expenses.
What's the difference between Term Life Insurance and Permanent Life Insurance?
There are key differences between Term Life Insurance and Permanent Life Insurance, including:
- Duration of Coverage: Term Life policies only cover you for a fixed period, though they may be renewed once they end, whereas Permanent Life Insurance has no expiry date and will cover you up right up until your death.
- Cash Value: Unlike Term Life Insurance, which only includes the death benefit, Permanent Life Insurance also has an investment-like savings component known as the cash value. Every month, a small portion of your premium payment is allocated to a tax-deferred cash value account, which increases slowly over time. The money in the account can be cashed in later for loans, retirement, or even to fund the policy premiums, though certain terms and conditions may apply. While the growth rate of a cash value account is significantly lower compared to other financial investments, growth is guaranteed, no matter what’s happening in the market.
- Cost: Investing comes at a price; Permanent Life Insurance is significantly more expensive—usually hundreds of dollars more expensive—than Term Life Insurance. In fact, many people end up surrendering their Permanent Life policies early on due to the high rates. For example, a healthy 40-year-old non-smoker could easily secure a 20-year Term Life policy with a death benefit of $250,000 for about $30 a month; a Permanent Life equivalent might cost anywhere from $200 – $300 per month.
Why is Term Life Insurance cheaper than Permanent Life Insurance?
Two reasons: Term Life Insurance covers a shorter window of time and only provides a death benefit. In other words, there’s no monetary or savings value unless the holder passes away within the term. That means, in most cases, the beneficiaries won’t receive a payout because the insured will outlive the policy. As a result, the overall risk to insurance companies is low, which in turn allows them to keep the premiums low.
In contrast, Permanent Life premiums are much higher because the coverage lasts a lifetime—your beneficiaries will get a payout regardless of when you pass away. Additionally, Permanent Life policies factor in both the cost and the guaranteed rate of return of your cash value investment.
How much does a Term Life Insurance policy cost?
While Term Life Insurance is low-cost in general, the price of your individual policy will be based on a variety of factors when you sign up, like your:
- Policy Terms: The longer your term and the greater your death benefit, the higher your premium.
- Age: Younger policyholders are presumably better in health and will pay less than older buyers or people with medical conditions.
- Health: Pre-existing health conditions or disabilities, a family history of disease, and various lifestyle choices (i.e. smoking or drinking) can drastically affect your life expectancy—and your costs. Some policies may even require a medical exam to review your personal health and family’s medical profile.
- Occupation: The cost to insure you might be higher if you work a dangerous or strenuous job.
Ultimately, if you’re not considered a high-risk for your provider, your rates will stay low.
Do Term Life Insurance rates go up over time?
That depends on your policy. Most carriers offer level premiums for the duration of the policy. That means your premiums won’t change over the course of the initial policy term, no matter how long it is. But once your insurance expires, your provider may raise your premium if you renew. This is known as guaranteed level term life insurance.
Alternatively, some companies may offer yearly renewable term life policies, which don’t have a specified term and can be renewed each year without providing proof of insurability. The only catch? The premium increases every year, becoming more expensive as the policyholder ages.
Which Life Insurance policy is right for me?
That’s up to you. Remember, Life Insurance isn’t one-size-fits-all; the right choice for you will depend on your individual circumstances, needs, and budget.
A Permanent Life policy might be worth it if you:
- Have high net worth and want to leave money behind for your heirs to pay inheritance or estate taxes;
- Are looking to build cash value;
- Need to provide lifelong care for a dependent (i.e. an aging parent or a child with disabilities); or
- Are willing to pay more for the security of knowing your loved ones will always be protected.
On the other hand, Term Life might be a better fit if you:
- Want a cheaper option;
- Only need insurance to replace your income for a given period (i.e. the years you’re raising your children or paying debts with a known lifespan);
- Expect to build wealth over time and self-insure;
- Think you can invest your money more effectively.
If you have no dependents, debts, or a mortgage, or if you’ve amassed enough savings to have enough of a financial safety net on your own, you might not need a Life Insurance policy at all. But whatever you choose, be sure to consult with a licensed Life Insurance expert or a financial planner to make the right decision for you and your loved ones.
What are the benefits of Term Life Insurance?
Some of the biggest advantages of Term Life Insurance include:
- It’s affordable. If you’re on a budget, a Term Life policy is your best option; it offers the same amount of coverage as Permanent Life Insurance for a fraction of the cost.
- It’s temporary. Term Life policies expire after a set number of years so they’re well-suited for people that require insurance for a particular time frame. You can also line up your policy’s expiration date with a time in your life when your loved ones will no longer need dependent support. And after your coverage expires, you put that monthly premium towards something else.
- It’s customizable. Temporary protection doesn’t mean less protection. You can customize the length based on your evolving needs—whether that’s a 10, 20, 30, or even 40 year term. And once your term is finished, you can cancel, extend, or convert it into permanent coverage.
- It’s straightforward. As long as you make your payments, your premium and death benefit won’t change for the entire length of the term.
- It’s cost-effective. Buying Term Life Insurance allows you to invest the money you would’ve paid for a Permanent Life policy into another savings vehicle. And with premium stability over the duration of your term, you’ll have the financial freedom to save for bigger purchases, trim down your debts, and make other high-reward investments without sacrificing on protection.
Plain and simple, a Term Life policy offers you the best bang for your buck: affordable coverage, when you need it, for however long you need it.
When should I sign up for Life Insurance?
Keep in mind: Life Insurance should be part of a larger financial strategy to secure your future and protect your loved ones. And while there’s no right age or time to sign up, you should use the flexibility a Term Life policy gives you to plan ahead if you’re thinking about:
- Starting a family (income replacement will be critical to support your partner and kids);
- Buying a home (your loved ones might need help paying off your mortgage); and
- Starting or co-owning a business (your beneficiaries can use the death benefit to settle any business debts or fund buy-sell agreements).
As a general rule of thumb, Life Insurance gets pricier the longer you put it off. The younger you are when you sign up, the less you’ll pay. If you get your policy early on, you can ensure a low monthly rate for your entire term.
What happens if I outlive my policy?
When your term expires, you have four options:
- Let your policy expire. If your children are grown and your loved ones are able to manage on their own without a death benefit—if you no longer have a need for Life Insurance—it might be a good idea to just let your policy expire. Remember though, once your term has ended, there’s no payout for your beneficiaries.
- Renew or extend your policy. You can renew your policy for another term or extend your coverage for a longer period, but your new monthly premium will be recalculated based on your age and health at the time of renewal. However, if you’re diagnosed with a major health condition or a terminal illness during your first policy term, you may not be eligible for renewal.
- Convert your policy.Most Term Life policies are convertible and some companies may even let you switch to a Permanent Life policy without evidence of insurability—but not all of them. Double check with your insurance carrier to see if your policy has an optional or built-in conversion rider or if there’s an age cut-off to do so (usually age 70 and above).
- Shop around. If you’re in good health and can easily qualify for coverage, you could easily shop around for a new policy with a more competitive rate.
Can I cancel my policy at any time?
You can cancel a Term Life policy at any time before it expires without paying an extra fee or losing any additional value, but you won’t get your money back. Why? A Term Life policy has no investment option and no value beyond the death benefit. Your payments reflect only the pure cost of Life Insurance that your insurer has provided, so you won’t be eligible for any return of premiums paid if you terminate or outlive your policy.
How long should my term last?
Ideally, your need for Life Insurance will end around the time your term life policy expires, so try to pick a term that’ll cover your longest loan, or at the very least the main years you’ll be paying the bills. But be careful not to undersinsure! Most people severely underestimate the amount of coverage they need and end up leaving major expenses behind for their loved ones.
A 10-year term is fitting for people with short-term obligations that won’t last for more than a decade, like car or student loans. Alternatively, if your children are grown, your house is paid off, and you’re close to retirement, a 10-year policy will supply your beneficiaries with enough to cover funeral arrangements.
Terms over 10 years makes more sense for anyone with financial responsibilities or debts that’ll likely last more than 20 years. Plus, a longer term will help keep the cost of insurance lower overall since you won’t have to keep renewing each time a shorter term expires.
Interested in a longer term? Don’t forget to factor in your health. If you’re at an increased risk of developing a critical illness or condition, try to lock in a long term early on before any issues of insurability crop up.
How much coverage should I get?
Try to estimate the financial impact an unexpected death will have on your family. Weigh up your liabilities against your income and assets so you have a clear idea of just how much your loved ones will need. Consider your:
- Annual Expenses: How much money would your family need annually to maintain their current lifestyle without your income? Are you a single parent? If not, is your partner’s income sufficient to cover all costs? Be sure to account for any future expenses on the horizon, like childcare and post-secondary education.
- Scope of Needs: How long will it be until your kids are fully independent? How many years are left on your mortgage?
- Debts: Do you have any outstanding loans or debts that your partner would struggle to pay by themselves? How much is left? Include your mortgage, car loans, student loans, business loans, credit cards, lines of credit, and any other debts you’ve acquired over the course of your lifetime. Add extra to cover any interest.
- Death Costs: Include the cost of funeral and burial expenses, which run anywhere from $7,000 to $20,000 on average, as well as estate fees and any legal services your beneficiaries might need.
In general, the ideal figure should be somewhere between the optimal amount of coverage and what you can comfortably afford. Most experts recommend a death benefit that’s about five to ten times your current salary. So if you make about $50,000 a year, you should aim for a policy that offers anywhere from $250,000 to $500,000.
RELATED: What is the “Right” Coverage?
Learning about Life Insurance can be overwhelming. We get it; it’s hard to picture a future when you won’t be there to support your family. It’s even worse worrying about whether or not they’ll have enough to provide for themselves.
But with the help of a licensed broker like PROLINK you can shop around, evaluate different insurance companies, and make an informed decision. We’ll take the time to listen, understand your lifestyle, and guide you to the best protection possible at the best price possible.
To learn more, connect with PROLINK today!
PROLINK’s blog posts are general in nature. They do not take into account your personal objectives or financial situation and are not a substitute for professional advice. The specific terms of your policy will always apply. We bear no responsibility for the accuracy, legality, or timeliness of any external content.