Term life Insurance
Term life insurance is a policy that lasts a set term — usually between 10 and 30 years — and then it expires. In most term life insurance policies, both the premium payments and the death benefit stay the same for the entire duration of the policy. If you die while the policy is active, your beneficiaries usually receive the payout in a tax-free lump sum. Term life insurance, unlike permanent life insurance, doesn’t build cash value.
Term life is the most affordable way to provide financial protection for your loved ones in the event of your death. It’s easy to manage and provides temporary coverage during the period of your life when you have the biggest expenses, such as a mortgage to pay off, or when your children are still young. Term life also doesn’t have any complex tax implications or restrictions.
- Term life insurance is the cheapest type of life insurance. For example, a 20-year term life policy with a $500,000 payout costs, on average, $30 per month ($360 per year) for a 30-year-old. A whole life insurance policy, by contrast, can cost up to 17 times more.
- Term life usually lasts between 10 and 30 years and in most cases the cost of your premiums stay the same throughout the term. The most popular term policies are 20-year term and 30-year term.
- If you die while your policy is active, your beneficiaries will receive a tax-free lump sum payout. Term life policies don’t have cash value.
- When a term life policy reaches the end of its term, it expires.
How does term life insurance work?
A term life insurance stays active for a set period of time, called the “term,” usually between 10 and 30 years.
During that term, you pay a monthly or annual premium to the insurance company. In exchange, the company pays a tax-free lump sum of money to your beneficiary if you die while the policy is active.
At the end of the term, the policy expires. If you still need coverage at the end of your policy, you can convert it into a permanent policy, renew your policy at a higher cost, or apply for a new policy.
Unlike whole life insurance, term life insurance doesn’t have cash value.
What are the main pros & cons of term life insurance?
Pros
Term life insurance is affordable. It’s cheaper than other kinds of life insurance, so you can get the coverage you need at a manageable price.
Term life is easy to manage and understand. Unlike permanent options like whole life insurance or universal life insurance, term life policies don’t have any complex tax implications or restrictions.
It provides coverage when you most need it. Term life offers financial protection during the period of your life when you have major financial obligations to meet, like paying a mortgage or funding your children’s education.
Cons
Term life insurance has an expiration date. At the end of the term, you’ll need to buy a new policy, renew it at a higher premium, or convert it into a permanent one if you still want insurance.
Term life doesn’t have a cash value savings component. Unlike permanent life policies, term life policies only offer a guaranteed lump-sum death benefit.
Who should consider a term life insurance policy?
- Anyone looking for an affordable, easy way to offer their loved ones a financial safety net for a set period of time in the event of their death should consider buying term life insurance.
- Newlyweds, married couples, and people who share expenses with a partner. Term life can provide income protection for your spouse in your absence.
- Parents, guardians, and people planning on having children. Term life is an affordable way to provide a financial safety net when raising children.
- Homeowners with a mortgage, or people with other significant debt. A term life policy can help your dependents cover any outstanding debts they might be responsible for in your absence.
How much does term life insurance cost?
Average monthly term life insurance rates
Term Riders
Riders customize your policy. You can add features like monthly income in case of a disability or early withdrawal of funds in the event of a cancer diagnosis.
All riders will cost extra. Depending on the rider, it may be a couple dollars a month to a massive percentage of the overall cost.
For example, the return of premium rider will refund you all of your premiums at the end of the term. However, this can double what you’re paying each month.
Some of the most common life insurance riders are:
- Accelerated Death Benefit – allows you to withdraw funds early when diagnosed with a terminal illness
- Accidental Death – doubles the benefits in the event of passing due to an accident
- Conversion Option – allows you to convert your term policy to a permanent one without underwriting near the end of the term
- Long Term Care – pays for nursing home care
- Child Term – covers a child until maturity then offers a permanent conversion option
- Waiver of premium – waives premiums upon diagnosis of a disability that prevents the ability to work
- Guaranteed Insurability – allows you to increase the death benefit of your policy later on without underwriting
Living Benefits of Term Insurance
Term isn’t designed to offer living benefits.
Some riders allow you to make use of your term policy during your life by pulling out some of the face amount (death benefit) early.
You’ll see these riders under the names like:
- Accelerated death benefits
- Critical illness
- Terminal Illness
Each company has a different list of the qualifying illnesses for taking advantage of living benefits. Make to discuss the differences between policies with your adviser.
Getting Your Money Back On Term Life Insurance (ROP)
Return of premium allows you to get all of your money back at the end of the term.
This can cost more but you’ll get it all back in the end of the term.
If you have the cash to afford the premiums, there’s a good chance you also have the financial discipline to invest the money going toward the rider instead. That way you’ll have more money in the long run.
Return of premium is a good option for people who can’t stand the idea that they may not get anything back from the insurance company if they outlive their term. However, it’s our opinion the money spent on that rider is better invested elsewhere.
Guaranteed Acceptance Term Insurance
Also known as guaranteed issue, guaranteed acceptance means that everyone gets approved. Health issues don’t matter. Underwriters ask few, if any, health questions.
term life insurance guaranteed acceptance
You often see these policies advertised on daytime television. They sound great. Some guaranteed issue policies come bundled with discounts on prescriptions and other membership perks.
The catch is that it’s significantly more expensive. Every other option you can find is cheaper. However, you can still get coverage, even if you’ve been declined for life insurance before.
They also have drastically lower benefit limits.
Guaranteed acceptance is only for people who cannot otherwise qualify for traditional life insurance.
Case Study: Female 31 years old, $500,000, 20 years term.
Conclusion
Term life insurance is best for temporary needs. The coverage stays in place for a limited time and is much more affordable as a result.
How USA Investment Solutions Can Help
Our primary goal is to assist families in safeguarding their financial well-being. We partner with over 90 of the country's highest-rated life insurance companies. We will shop them all to find you the lowest rate for the coverage and benefits, taking into account their individual needs and health status. We understand that each individual, business, and family requires a tailored life insurance solution. Our mission is to assist you in discovering the perfect plan for your needs. or complimentary quotes and consultations, please reach out to us s at (714) 794-2009, email us at info@usainvests.com, or fill out our contact form. We're here to assist you, and there's no pressure to commit. Even if you're currently working with a professional, seeking a second opinion can offer valuable insights and perspectives.