Dependable Advice on Types of Term Life (Coverage Comparisons & More)

Term life insurance is one of two general options for life insurance. The other is permanent or whole life insurance. The distinction between the two is term life is coverage limited to a specified period of time.

Term life can be an affordable way for you to maximize your coverage. A basic term policy can help you protect your family or your business and in some cases provide you with options to stay protected when the term is complete.

In this expert guide, we’ll provide you all the information you need to find and purchase great term life insurance.

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What is term life insurance?

Term life, like all life insurance, provides financial security to loved ones if a policyholder dies. With a term policy, coverage is provided for a predetermined period of time.

Usual term durations can range from one to 35 years. However, the most common terms offered by providers are 10-, 20- or 30-year policy terms.

Although some life insurance types might offer cash value or other features, term insurance is meant only to provide insurance protection.

Because a term policy doesn’t have many bells and whistles, it’s a more affordable option than whole or permanent life insurance.

Getting a term life policy is also easier than finding a whole or universal term policy.  Check out this brief video from Shine Insurance that provides some helpful tips for securing a term policy.

https://www.youtube.com/watch?v=hR2MaPaMgdU

Most basic term life policies are level term policies that are easy to understand. When you purchase a term life policy, you agree to make consistent premium payments of a specific amount for the duration of the policy.

As long as your premiums are paid, you’ll be protected for the amount of benefit determined in the policy.

However, some providers offer different types of term and payment options to give flexibility to consumers.

Increasing and decreasing term policies allow policyholders to maximize benefits and vary payments to meet their lifestyle. Renewable and convertible term policies ensure that policyholders won’t have a lapse in coverage when the term expires.

Types of Term Life

There are five types of term life.

• Level term
• Increasing term
• Decreasing term
• Renewable
• Convertible

Before we get into the details of each of these term types, let’s take a look at whether term life insurance can benefit you.

Who Should Consider Term Life Insurance

At some stage in your life, you’ll be responsible for your own care and the care of others. Whether you are just starting out with adult life and a career or are older, established, and looking forward to retirement, a term life policy can provide a large benefit for an affordable premium.

Having a policy in place to protect the financial security of your loved ones is important, as well. If you fit into one of the categories above, you should look into term life as an option.

In the short video from CNBC, it helps you understand if you need life insurance at an even younger age.

Homeowners

Term coverage ensures that if anything happens to you, loved ones are not burdened with covering your mortgage commitments.

Couples

Married couples or singles living together may want insurance to protect their partner if anything should happen. Even for younger couples, this can help cover student loan obligations, car loans or other commitments.

Parents

As a parent, you want to ensure the well being of your children. Whether they are newborns or finishing up college, you want your children to be protected should anything happen to you.

Caretakers

If you provide care for an elderly parent or family member, you’ll want to make sure they are taken care of if anything happens. Having a term policy in place can provide ease of mind that they will continue to be cared for.

Term Life is Not an Investment

If you’re looking for an investment that will grow as an asset or a policy that will cover you forever, term life is not what you want. Term life does not have a cash value component, and you can’t resell your policy.

How much will a term policy cost?

The cost of any life insurance policy depends on many factors that contribute to the overall risk of passing away sooner than later.

Your health, family medical history, financial well-being, and even the town you live in could influence your rate.

Your occupation can also affect your insurance rates. Jobs that are higher stress or dangerous raise your risk profile.

Term life doesn’t cover you forever. Nor does a term life policy provide any investment value. These features are components of whole or universal life policies. Because of this, term rates are cheaper than rates for whole or universal policies.

Shopping for a term policy will be cheaper if you get a policy when you’re younger. As you age, policies for longer terms will be more costly. However, your needs will change over time, so the amount of coverage you need at 30 may not be what you need when you are 50.

Tools are available for understanding how much life insurance you might need.  You can also rely on some helpful calculators to determine your needs.

Where it gets tricky is determining how your needs might change over time. For instance, if you’re 40 years old and have a mortgage, a car loan, a great job, and two kids that have to still get through college, you may calculate that your coverage needs are $750,000.

However, in 20 years, the kids will be done with college, you might decide to downsize your home, and you may have enough in the bank to cover your expenses comfortably for the rest of your life.

Buying a term policy for a longer-term might lock you in for higher payments in years when you don’t need all of that benefit.

If you feel your needs will change dramatically, you can look at term life options that we will discuss later, such as increasing or decreasing term insurance. You can also take shorter-term insurance and reevaluate your needs as the term policies expire.

The table below shows a sample rate for a $500,000 benefit over different terms. These sample rates are for men with no health concerns who don’t smoke.

You can see that rates for longer terms can increase dramatically for older customers.

Rates for female customers are always cheaper than rates for males. The table below presents rates for a female non-smoker in good health.

Across the board, rates are lower than the corresponding sample rates for men. This is mainly because female life expectancy is longer.

Of course, if you want to keep your rates low, you’ll have to avoid smoking. Term rates can double in your earlier years and triple later in life for smokers. If you’re a 50-year-old smoker shopping for a 30-year policy, your provider may not even consider you.

The sample rates in the tables above are all for level term insurance.

Keeping premiums constant through the life of your policy may not be the best thing for you. Before you start shopping, you need to understand your options. Let’s take a look at the specific features of each type of term.

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Level Term Insurance

Level term insurance is the most common type of term policy. Level term means that the benefit or the policy does not change for the life of the policy, and your premiums will remain at the same level through the life of the policy.

Who should consider level term insurance?

Most people shopping for policies will end up with a level term policy. As the most affordable option, younger people will get the best benefit protection and will be able to lock in a rate for the life of the policy.

If you consider that even getting 10 years older can amount to almost a 50 percent increase in premiums, you’ll want to lock in a good rate and keep it.

Older customers might opt for cheaper term coverage to cover obligations they might have in the near term.

For instance, if you’re 50 years old and your home mortgage will be paid for by the time you’re 65, you may opt for a term policy to cover the cost of the mortgage should anything happen, and a whole life policy for the remainder of living expenses for any loved ones.

Is a level term policy a good investment?

In the traditional sense of investment, a term life policy doesn’t have any value. Level term policies don’t have a cash value component like whole life policies, in which a component of your premium goes toward building value.

Any value in a term policy is intangible. A term policy is purely for risk mitigation and is not a wealth-building tool.

How much does a level term policy cost?

As mentioned earlier, the cost of your insurance depends on your age, health, family health history, financial situation, where you live, and other risk factors. If you want a low rate, remember that even something such as the amount of alcohol you drink can affect your rate.

Some providers seem more expensive, but it’s always helpful to understand what features are built into the policy.

More expensive providers could be offering built-in riders for accidental death coverage, whereas a cheaper policy might have built-in fees for early termination or yearly management.

When comparing costs, look beyond the rate and be sure that you discuss any additional fees before you get a policy.

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Increasing Term Insurance

With an increasing term policy, death benefits increase as the policy matures. Plans can be structured so that premium payments remain constant for the life of the policy or increase as the benefits increase.

Who should consider increasing term insurance?

Increasing term insurance is useful for people who bought whole life or universal life insurance but found that their policy’s benefits became insufficient over time.

By purchasing a supplemental increasing term policy, they can keep their whole life policy in place and use the increasing term insurance to buffer any cost-of-living increases over time.

For example, let’s say you bought a whole life policy for $500,000 10 years ago. At the time, a $500,000 policy and your savings and retirement plans covered any living expenses if anything were to happen, allowing your loved ones to live at the same level of comfort.

Since then, cost-of-living increases, taxes, and expenses from medical costs have created a situation where you don’t think your loved ones will be able to maintain the same life quality if anything happens to you.

Even worse, with increasing care costs every year, you may need even more in another 10 years.

Getting a supplemental increasing term policy allows your whole life policy to cover most of your expenses, while the increasing term covers only the year-after-year increases you foresee.

You can lock in a defined premium that might be slightly higher today, but expect that your benefit will adjust over time to meet the increased benefit you will require.

How much does an increasing term policy cost?

An increasing term policy is usually set up in a way that you will be paying more in premiums now for higher benefits later. In this sense, the policy is expensive at first but eventually, the benefit will catch up.

Since your benefit grows as you grow older and become a higher risk, you can expect that an increasing term policy premium will be higher than a level term.

Actual rates depend on whether you decide upon a level premium payment, the duration of the term, and your overall risk.

Decreasing Term Insurance

The opposite of increasing term insurance, decreasing term insurance provides you greater benefit today while decreasing until the policy matures. In some instances, providers refer to this type of insurance as mortgage protection insurance.

If you buy a home today, you’ll want to make sure that if anything happens to you, your family can pay off the principal loan on the home and live worry- and payment-free.

Today the loan principal amount might be $250,000. Over 20 years, that principal could drop to $80,000. By getting decreasing term insurance, you can get the benefit of a lump sum payout to meet the principal loan amount, whatever it is.

Who should consider decreasing term insurance?

To understand how decreasing term insurance could help a policyholder, consider the examples below.

• As in the example above, anyone with a mortgage can consider a decreasing term policy.
• For older couples, a decreasing term policy may be a good option for specific situations. For instance, if you have kids in college and a high income to replace, you may want a higher benefit.  Over time, your lifestyle will require less, so you may not need as much benefit.
• Businesses might consider having a decreasing term policy to protect their heavy initial investment costs. When you start a business, you might have to borrow a large amount of money from investors or use your own cash to get things started. If anything should happen while the business is young and struggling, you’ll want to make sure your insurance meets the costs of those loans. As the business becomes stable and you reduce debt and retain cash, the need for a higher benefit might become obsolete.

How much does decreasing term insurance cost?

Similar to increasing term insurance, specific rates will depend upon risk factors and the way the policy is structured.  When looking for a decreasing term policy to protect your home or business, working with an agent or financial advisor might be best.

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Renewable Term Insurance

When you buy a term insurance policy, you might feel as though you are protected and may forget to consider what happens when the policy expires.

If you purchase a policy while you are younger, your insurance provider may not even require you to go through a full physical exam or extensive medical review. However, when you look to renew your policy, things might be quite a bit different.

A renewable policy guarantees you the right to renew the policy without providing new proof of insurability.

A lot can change over a standard term period of 10-, 20-, or 30- years. Even a slight hiccup in your health can make an insurance provider question your insurability.

If you want to avoid problems with getting a term plan later in life, you can opt for a renewable term policy.

A renewable term policy ensures that you can renew your plan. However, you should expect that your premiums will rise during each renewal period. Even if your health has not been subject to any issues, the older you get, the more insurance will cost.

Who should consider renewable term insurance?

Renewable term insurance provides peace of mind for those who want to ensure they always remain covered. When a policy expires, the guarantee of a renewable term alleviates the headache of shopping and qualifying for a new policy. You also will have your term in place without having to submit to a new evaluation.

Most term policies sold today are renewable. Customers don’t want a lapse in coverage, and at the end of a term, a renewable policy gives the consumer an option to shop around for a better policy or to continue with their current policy.

If you’re getting a term policy later in life, you’ll want to make sure your policy is renewable. The last thing you want is a lapse in coverage if you can’t find a suitable replacement.

How much does a renewable term policy cost?

For the initial level term period of the policy, policy rates can be reasonable, subject to your overall health and other risk factors. When the term expires, your insurer will reassess your risk factors.

Renewable terms can be reassessed annually depending on how the policy is written. You may see an immediate increase from your level premium during the first renewal, and then gradual increases in premiums over time.

Actual rates will depend on the policyholder’s age, health history, and other factors at the time the policy is bought.

Convertible Term Insurance

Similar to renewable term insurance, a convertible term policy is designed to ensure you never have a lapse in coverage.

The difference is that instead of having the policyholder continue with the same term plan, a convertible term policy allows policyholders to convert their insurance to whole life or universal coverage without a new approval or medical assessment.

When you’re younger, a term plan might be enough to protect your loved ones. As you grow older, you may want to be able to do more than just cover expenses when you pass on.

Whole life and universal life policies provide opportunities to build value in the policy. Additionally, benefits have tax incentives for beneficiaries.

Of course, the older you get, the harder it may be to qualify for a suitable universal plan on the open market. You’ll need to submit to a full medical exam and review, and there’s no guarantee that you will qualify.

With a convertible term plan, you are assured that once your term expires, you have a predetermined whole or universal life plan in place without a medical reevaluation.

Who should consider convertible term insurance?

If you’re concerned about qualifying for an affordable whole life insurance policy later in life and have a term policy, a convertible term policy will ensure that you are covered.

By opting for a convertible term policy early on, you guarantee that you have a plan in place. You always have the option to try to qualify for a more affordable or more robust plan if you prefer not to convert.

If you like your insurance provider and have multiple lines of coverage, you may want to keep the policy with the same provider. Having a convertible term policy ensures that you’ll qualify with your provider.

Whole life and universal life policies are investment tools. Where term life plans don’t have a cash value component, part of your premium payment into a whole life plan goes to building its value.

The cash component will grow with interest, and in some cases can be invested to get competitive returns.

This can be a useful tool to help you grow your money and provide you with emergency funds when you need it. Whole life policies also allow policyholders to take out loans against the cash component of their policy.

As a part of your financial estate, whole life policy benefits are not considered income.

A person who would like to leave a benefit to heirs without a large tax burden might opt for a convertible term policy now and benefit from having whole life later.

So even if you aren’t thinking about the long term now, a convertible term policy allows you to get the security you need now with the option of building a nest egg through your life insurance later.

Shopping for Term Life Insurance

Shopping for affordable term life insurance doesn’t have to be so intimidating. By familiarizing yourself with the different types of term life outlined here, you now have a great foundation to help you sort through all the different providers and options.

Now let’s narrow things down a bit more by going through a few preparation steps.

First, calculate the amount of benefit you would like to have. A good guideline is to add in seven to 10 years of your current salary, any student loan, credit card, mortgage, or car loan debts and costs you have for taking care of family members.

You may find that you’d like more coverage than you can currently afford.

Remember, though, that you have options. You can increase or decrease your benefits over time, or you can simply get more coverage for a shorter term now and then adjust your needs as your income, financial goals, and family situation change.

Next, be ready to present yourself as an optimal candidate for insurance. Don’t smoke, stay away from any illicit drugs, eat healthy, and exercise regularly.

In most cases, you’ll need to supply some forms of medical information or even get some blood work done. If you’re in great shape, you’ll have nothing to worry about.

If you’ve had health concerns, don’t despair. You may have higher premiums, but there are options. If you have diabetes or have had a heart attack, you can still qualify for quality term life.

Finally, assemble several quotes to compare. You’ll need to compare a few companies and conduct some research to ensure that the providers you’re looking at are reputable and financially stable. The last thing you want is for your insurance company to not be around when you need to file a claim.

If shopping online for insurance isn’t something that gets you excited, reach out to an agent whom you trust to help you find the right solution for you.

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Pros & Cons

The table below provides a quick summary of the highlights for each type of term insurance.  Use the table for a quick recap to help identify what features are available and what features you need.

Term level insurance can be as simple or complex. The policy you choose should be based on your specific needs. Review the table above and determine which type of level term fits your current requirements. By starting there, a qualified agent can help get you the right policy.

The Bottom Line

If you’re thinking about term life insurance, you are likely responsible for the care of others. Whatever stage of life you’re in, term life provides the most affordable option to help you protect your loved ones financially. It also provides a simple solution that’s easy to understand.

With the different types of term insurance, getting a policy now can also help ensure that you’ll always be covered when you need it most.

With options to adjust your benefit to match up with when you want the most security, you can ensure that the big-ticket items in your life such as your house or a college payment are never at risk.

You can also plan for the future. By opting for a renewable term or convertible policy, you can ensure that you’ll never have a lapse in coverage. You can also use your term insurance to supplement other policies for times when you need more coverage.

Of course, getting term coverage when you’re younger and healthier is always easier and more affordable, so why wait?

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