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Purchasing life insurance offers a way to provide income for your family after you're gone, help pay for your burial expenses or even leave money to a favorite charity. When shopping for life insurance, you'll have to decide between two main options: permanent and term life insurance. Unlike permanent life insurance, which typically lasts your whole life, term life insurance provides coverage for a defined period, typically 20 years.
Term life insurance is the most popular kind of life insurance because it's flexible and significantly less expensive than other options. But is it right for you? Here's what you need to know.
How Term Life Insurance Works
Term life insurance covers you for a set time period, which can range from one year up to 30; there are also policies that cover you up to a certain age, such as 65. If you die while your term life insurance policy is in force, your beneficiaries receive a payout called a death benefit.
Term life insurance premiums typically remain the same throughout the term, although some policies allow for adjustments. Premiums are based on several factors, including your health (usually determined by a medical exam), age, sex, risk factors (such as whether you smoke) and the amount of coverage you buy.
- Renewable term life insurance guarantees you can renew the policy when the term ends without a medical exam. The insurer can't refuse to renew your policy, even if your health has declined. However, premiums can rise due to your increasing age.
- Non-renewable policies can't be renewed; you'll have to apply for new life insurance, either with your original insurance carrier or a different carrier.
- Convertible term life insurance can be converted to permanent life insurance without providing additional evidence that you're insurable (such as a medical exam).
Term life insurance differs from permanent life insurance, which lasts your lifetime (or up to 99 years of age, depending on the policy) as long as you keep paying your premiums. In addition to a death benefit, permanent life insurance builds guaranteed cash value that you can tap into or borrow against if you want.
The most common type of permanent life insurance is whole life, which doesn't let you change the premiums or coverage after you buy it. Another type, universal life, lets you change your coverage and premium payments if you choose. Unlike whole or universal life, variable life insurance doesn't guarantee the cash value will rise. However, it lets you choose from various investments, which could give you better returns. In general, permanent life insurance is much more expensive than term life.
The older you are, the more term life insurance will cost you, regardless of your health. Men also generally pay more than women. For example, a 20-year, $500,000 term life insurance policy for non-smokers in good health costs an average of $27.16 per month for a 25-year-old man and $21.24 for a 25-year-old woman, according to Policygenius. At age 55, however, the average cost of the same policy rises to $152.57 per month for men and $108.91 for women.
Pros and Cons of Term Life Insurance
To decide if term life insurance is right for you, consider the pros and cons.
Pros
- Less expensive than permanent life insurance
- Simple to understand
- Flexibility to choose the term you want
- Good for short-term needs
- Premiums generally stay level over policy term
Cons
- Limited coverage period
- No cash value
- Premiums rise when you renew or apply for a new policy
- Premiums for some policies can rise during the term
Should You Get Term Life Insurance?
Term life insurance can be an affordable way to ensure your family can handle their living expenses after you're gone. To decide how much coverage you need, consider your family's monthly expenses, debt obligations (such as a mortgage or auto loan), and future needs (such as paying for a child's college tuition or wedding). Also consider how your death would affect your loved ones' finances; for example, if a stay-at-home parent with young children dies, the survivor would need to pay for child care. Finally, assess any assets your family will receive upon your death (such as your retirement accounts, pension or Social Security). Review or reassess your budget to strike a balance between how much life insurance you need and what you can afford to pay.
Many people buy term life insurance to cover financial needs for a specific phase of life. For instance, parents of young children might buy a 20-year term policy to help a surviving spouse raise the children if the need arises. If you have a 30-year mortgage, you could buy a 30-year term policy to ensure your family can pay off the loan.
When your policy term ends, you may choose not to renew, depending on your financial situation. For example, if your children are grown, your home is paid for and you're close to retirement, your surviving spouse might not need a death benefit to live comfortably.
An Affordable Option to Protect Your Loved Ones
Compared with permanent life insurance, term life insurance is a reasonably priced way to provide financial security for your family after you're gone. When buying term life insurance, be sure to ask if the policy is renewable and whether the premiums can increase during the term.
Some insurance companies check credit-based insurance scores when you apply for life insurance. These scores weigh different data from consumer credit scores such as the FICO® Score☉ . However, if you have a good consumer credit score, you most likely have a good credit-based insurance score as well. Maintaining good credit is always a smart move, so before you apply for life insurance, review a free copy of your credit report and check your credit score to see how you're doing.