Term life insurance is a type of policy that provides coverage for a specific time period (term) and for a specific dollar amount. It is often referred to as temporary insurance or pure insurance because the policy does not have any cash value or any of the other features available on other types of life insurance policies.
Usually you can buy term policies for 1, 5, 10, 15, 20, 25 or 30 year terms. This means the premium you pay will be fixed for You pay a premium which provides coverage for a period of time during which the insurance company will pay your family a specified amount of cash in the event of your passing. If you are still alive at the end of the term period, you coverage ends, and nothing is paid to you. However, if your policy definition allows, you may renew the policy but your premiums will be higher than during the level term period and may increase every year as you get older. Each insurance company would have different options and features on their policy, so you need to be aware of what options are available to you.
Term life insurance is generally appropriate for situations when there is a need for insurance but not much cash flow to pay for it. For example, a young family may want to have coverage for living expenses and education needs. Term insurance is well suited to cover short-term needs, such as coverage during your working years, the college years, or for the duration of a loan or mortgage.
You can buy term insurance coverage for the time period that best suits your needs. For example, if you have a 30 year mortgage, you can buy a 30 year term. Or you can buy a 20 year term and, assuming you are still healthy 20 years later, buy another 10 or 20 year if needed. The amount of coverage you purchase should be based on a variety of factors such as debts, education cost for dependents, income replacement for a breadwinner, etc. As your debt and financial obligations decrease, you can reduce the amount of coverage you have.
Depending on the amount of coverage you are purchasing, your qualification requirements will be different. Some companies require a blood test/urine test and other exams where as other companies perform simplified underwriting. Simplified underwriting just requires a phone interview where you are asked a series of detailed questions about your medical history. If you are a smoker, you will pay significantly more for life insurance. For example, a non-smoker male age 35 who gets a preferred rate for $250,000 for 20 years will pay about $205 per year. If he is a smoker, the premium will be $525 per year. It pays to quit smoking or don’t quit and pay! Your choice!
This version of term life insurance returns 100% of your premiums to you (with no interest) at the end of the term assuming that you are alive at that time. Of course, you will have to pay for this privilege! For example, a 35 year old male purchasing a $250,000 – 30 year term policy with a super preferred non-smoker rate will pay around $255 per year for a standard term life policy. If he were to purchase an identical term policy with the return of premium feature, he would pay $563 per year instead of $255 per year. If he is not deceased at the end of 30 years, he will receive $563 X 30 from the insurance company. That’s a check for $16,890. The life insurance coverage will then terminate.
Return of Premium Term Life Insurance policies are more expensive than standard term life insurance and the premium is only returned if you outlive the policy. In the above example, the difference was $308 per year. Over 30 years, that equates to a difference of $9,240. Before selecting this option, consider what alternatives you may have for saving or investing that money, and whether you may want access to those funds earlier than the 30 year time frame.