The best type of life insurance policy for most people today is term life. What is term life insurance? It's the most affordable and applicable to the needs of Americans. Today you'll learn everything you need to know about term life insurance and how it can benefit you and your family.
Before I had children, I got a 10-year, $1 million term life insurance policy. Now I wish I had gotten a much longer policy that would have covered getting my kids through college. The younger you are, the more affordable term life insurance tends to be, yet we tend to undervalue the importance of having it.
But even if you're getting a policy to protect your loved later than you wished, that's better than never. Let's take a look at the fundamentals of a term life insurance policy first and then I'll show you the easiest and most affordable way to find a policy that fits your needs today.
Definition Of Term Life Insurance
What is term life insurance you ask? It's a type of life insurance that guarantees payment of a specified dollar amount within a documented time range, ie term. Once the end date arrives and the term expires, the policyholder has the option to do nothing and have the policy expire, renew the policy for another term typically at a higher cost or convert the policy to permanent coverage.
A simple way to think about term life insurance is like renting an apartment. You sign lease (policy) for a certain period of time (term). Then you pay your landlord (insurance company) a monthly amount of rent (premium) to get shelter in that apartment (life insurance). When the lease runs out you leave (let the policy expire) or renew the lease for a new period with either the same or a newly agreed price.
Its purpose is to provide your loved ones, known as the policy's beneficiaries, a lump sum dollar payout amount to help them pay for their various expenses or needs should you pass away during the policy's term.
What are the most common terms, ie time periods for term life insurance? They are 10, 20, and 30 years. As mentioned earlier, I purchased a 10-year term policy before I had kids.
What are the most common death benefit amounts? The most common starts at $100,000 followed by $250,000; $500,000; $750,000 and $1,000,000. Term life insurance policies can also be purchased in the multiple-million- dollar range, but the premiums are considerably higher and involve a more thorough underwriting process.
More Info About Term Life Insurance
- Term life insurance premiums are lower than whole life insurance premiums.
- How much you pay for a term life policy depends on your age, health, and life expectancy.
- The younger and healthier you are, the lower your premium.
- The face value is only paid to your beneficiaries if you die during the specified term.
- Many policy premiums go up at a larger pace from age 40 due to the onset of more illnesses.
- You can compare term life insurance policy premiums at the top carriers for free with PolicyGenius, the #1 life insurance marketplace where qualified lenders compete for your business.
How Term Life Insurance Premiums Are Determined
Term life insurance premiums are mostly determined by your age, gender, medial history and current health status. Other factors that are commonly used to determine premiums are whether you are a smoker, your driving record, active medications, job type, leisure activities, and medical family history.
Depending on the size of the term life insurance policy you seek, a medical exam may be required. Exams are typically required for policies that are $1 million or larger, although some companies require them for policies $500,000 or more.
Monthly premiums for term life insurance are fixed, ie they are the same every month for the policy's duration. If you renew, they are likely to be higher due to you being older. Thus, it can be to your advantage to buy a long policy term at a young age if you can afford it.
Wondering how to decide how much life insurance to get? Check out my article: How Much Life Insurance Do You Really Need?
3 Main Types Of Term Life Insurance
1. Level term
The most common type of term life insurance is level term. This type provides coverage for a specified time period ranging from 10 to 30 years. The death benefit and premium are fixed. These premiums are typically higher than yearly renewable term policies described below.
2. Yearly Renewable Term (YRT) Policies
(YRT) policies have no specified term but are renewable every year without requiring evidence of insurability each year. Premiums start off low and increase over time as the policyholder ages. Thus, premiums can get prohibitively expensive with time. So this type of term life insurance isn't as popular as level term.
3. Decreasing term policies
The third type of term life insurance is decreasing term. In other words, the payout amount decreases over time based on a predetermined schedule. The monthly premiums are fixed however. This type of policy is often paired with a mortgage with the policy's payout decreasing alongside the declining mortgage principal. This is typically the cheapest of the 3 types.
Consider A Conversion Rider
Before signing the documents for a new term life insurance policy, I highly recommend inquiring whether the policy has a conversion rider.
A conversion rider would allow you to convert a term life insurance policy that’s about to expire into a permanent policy without going through underwriting or proving insurability.
This type of conversion rider is valuable because as we age, bad things tend to happen. If something were to happen to your health during the initial period of your term life policy, your original health rating is protected with a conversion rider.
Of course, this type of rider will increase your monthly premium amount, so you'll have to determine what's best for your current and future needs.
Compare Term Life Insurance Policies For Free
Term life insurance is a wonderful way to protect your loved ones should anything happen to you. Take advantage of cheaper premiums while you are young and healthy if you can.
Even if you don't have a mortgage or any dependents right now, that could very well change in your future. And being able to lock in good rates can save you a lot of money in the long run if you plan to start a family and own property down the road.
Thanks to technology, it's easier than ever to compare term life insurance policies. But stay away from Health IQ.
The most efficient and free way to get competitive life insurance quotes is to check online with PolicyGenius. They are the #1 life insurance marketplace where qualified lenders compete for your business.
You can quickly search for policies across multiple carriers through PolicyGenius's online portal for free. I’ve know the founders of PolicyGenius for years and they have truly build a fantastic resource for individuals.
Learn More About Life Insurance
Want to learn even more about life insurance? I've written more articles that you should find useful and informative. Here are a few to explore:
- Different Types of Life Insurance Explained
- What Is Whole Life Insurance?
- How To Get Life Insurance Without A Blood Test
For even more great resources, check out my Top Financial Products page. You'll find lots of fantastic resources I've used that can help you increase your financial knowledge and grow your wealth.
About the Author: Sam started Financial Samurai in 2009 as a way to make sense of the financial crisis. He proceeded to spend the next 13 years after attending The College of William & Mary and UC Berkeley for b-school working at Goldman Sachs and Credit Suisse. He owns properties in San Francisco, Lake Tahoe, and Honolulu and has a total of $810,000 invested in real estate crowdfunding.
In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $260,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies and writing online to help others achieve financial freedom.