When people think of life insurance, they often think of whole life insurance, which is something that you keep paying for until you pass on. Once you die, the assets in the policy are passed on to named beneficiaries. Term life insurance works in a similar but somewhat different manner.
With term life insurance, you set an amount of time, or term, that you want to be covered for. Instead of paying towards a policy until your death, you pay for a set amount of time, such as five, 10, 20 or 30 years. As with standard life insurance policies, if you pass on during the term, your policy will pay out to your beneficiaries.
If you’re still alive at the end of the term, your options are normally to end the policy, renew your policy or convert it to a whole life insurance policy. The cost of your premiums after your term ends and you extend your life insurance will depend on how your initial policy was set up.
What Affects Policy Rates
As with whole life insurance, your policy premiums will depend on factors like your age, health and the amount that you’d like paid out to your beneficiaries. Other factors that determine the cost of term life insurance policies include the length of the term and whether it is renewable. Whether you have a level policy, which is where the premium remains the same throughout the term, will also affect your premiums. Many insurance providers now offer hybrids where a set number of years are level, but premiums can increase after the set time passes.
Another factor that can affect the cost of term life insurance premiums is if someone opts for a policy with a return of premium feature. For many other types of insurance policies, people receive a refund on what they’ve paid in premiums if they never have to use their insurance. This is normally not the case with term life insurance.
Due to demand, some insurers have started making term life insurance policies with return of premium features available. However, the cost of these policies is often significantly higher than policies without them; it is not uncommon for these policies to have premiums that are double those of policies without return of premium features. Additionally, you normally are required to keep the policy for the full term to be able to receive the return of premium payout.
The Benefits of Term Life Insurance
One reason that many individuals opt for term life insurance over whole life insurance is that it is far less expensive than whole life insurance. The reason for this is that whole life insurance will almost always result in a policy payout. However, in a large number of cases, term life insurance policies won’t be paid out because people will live beyond the term.
The cost of premiums for term life insurance is often a fraction of the cost of whole life insurance premiums. For someone in their 20s or 30s, the annual premium for a 30-year term life insurance policy is about 10 to 15 percent of the annual policy premium for whole life insurance. If someone takes out a 20-year term policy, the annual premiums can be less than 10 percent of the premiums for a whole life insurance policy.
This very low cost allows even younger individuals who aren’t making a lot of money to provide a safety net for their family. Even if someone cannot afford whole life insurance, they can often manage to pay for term life insurance. Once someone is older and the term has expired, they can convert their term policy to a whole life policy. Alternatively, many people who are in their 40s or 50s have paid off their home and no longer have children living with them, which allows them to create a financial safety net without an insurance policy.