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Understanding Term Life Insurance Policy

Elanora Brown Elanora Brown , 9/12/2018
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What is Term Life Insurance?

Term life insurance as the name implies is a type of life insurance policy that is obtained for a specified amount of time, hence the ‘term.’ It allows the payment of a death benefit to your loved ones if the insured dies within the defined term of the policy. If the term ends, the policy also gets expired. You do have an option to renew the policy or convert it into permanent coverage. 

Term life insurance policies are easy to understand when compared to other policies. The policy terms are usually chosen by buyers keeping in mind the number of years their families may need most financial support. Let's say you have a mortgage or other outstanding debts that need to be paid off or a child who will need your help in paying off his college fees. When you have needs like these that are temporary, its best to opt for term life insurance. You can choose a policy of 5,10,15,20,25 or 30 years depending on your family needs.


Characteristics of a Term Life Insurance Policy:

Term life insurance is the most affordable and easy-to-get policy. Unlike other types of life insurance policies, it has no investment component or cash value other than the death benefit.

You cannot borrow a loan against a term life insurance policy. If you failed to pay premiums before the term ends, your policy would lapse, and there will be no coverage.

If the policyholder dies after the policy expires, there will be no payout. You can always renew the policy if you feel the need but the premiums will be calculated in accordance with the age and health of the applicant at that time.

Let’s look at an example:

A guy named Bob who is 35 years old, non-smoker wants to provide his family with a net of financial protection in the unlikely event of his early death. He buys a $500,000, 20-year term life insurance policy with a premium of $21 per month. Should Bob die within the 25-year term, his family will receive a death benefit of $500,000. If he lives the entire term period, the policy will expire unless he decides to renew it. His beneficiaries will receive no death benefit after that.

Types of Term Life Insurance Policies:

Level-premium or level term is the most common type of term life insurance. It is available for term years ranging from 10-30 years. If you buy this policy, your premiums will remain the same every year until the policy expires.

Yearly renewable term life has no specified term and must be renewed every year. As you renew the policy, the premium amount increases because of the increasing age of the individual.

Decreasing term life policies are for most suitable for people who want to cover a specific debt like a mortgage. This is a type of term policy where your death benefit declines each year with level premiums.

“Return of premium” term life will refund you the premiums you paid the whole term if you live the policy term. It is because of this refund feature that this type of term life policy is more costly than the other types.

Who Needs Term Life Insurance?

Term life insurance is most suitable for parents with young children, single parents, students taking loans, and mid-aged people who want to provide financial protection to their family to pay off any outstanding debts, mortgage and help with final expenses in an unlikely event.

Term life insurance is also a better fit than permanent insurance if you don't plan to leave a legacy for your family members or to charity. This is because you think they are quite self-dependent and have enough liquid assets to provide them with the financial assistance they may require later in life.

The Cost of Term Life Insurance

If you compare term life insurance quotes with a permanent life insurance quotes, you will see a big difference in the cost and affordability. This is because of the factors that are primarily taken into consideration when underwriting a term life insurance policy. These factors include your age, your health, the amount of coverage you are buying and if you are a smoker or not.

According to a certified financial planner Andy Tilp, president of Trillium Valley Financial Planning near Portland, Oregon, term life insurance is the best option for most life insurance shoppers.

Sample Term Life Insurance Rates:

We looked at rates for a $500,000, 20-year term life policy and found that a healthy 30-year-old man can buy one for $20 a month; a healthy 30-year-old woman could buy the same coverage for $18 a month. Shopping around and comparing life insurance quotes pays off. Rates may differ depending on your health and lifestyle choices.Lifequote.com is an independent life insurance agency that strives to provide its clients with the best rates possible without any inclination towards any specific life insurance company. So,go ahead and get your free life insurance quote today.