Term Insurance Definition
Term insurance is a type of life insurance that provides a benefit for a specified number of years. When the term ends, the policy ends. Term insurance policies usually last for 5, 10, 20 or 30 years, and they provide your beneficiaries with a tax-free payment if you die during the policy term. It is possible to purchase a policy with a small death benefit, such as $10,000, or a very large death benefit, such as $10,000,000, or anywhere in between. How much of a death benefit you select depends on what your family’s financial needs would look like in your absence and what premiums you can afford.
Smaller policies may be available without medical underwriting, but most coverage amounts require you to pass a medical exam and submit your medical history for review. If your current or past health is poor, you may not qualify for a larger policy. The better your health, the lower your premiums. If you cancel your policy before the term ends, you don’t receive any money.
Example
Walt & Skyler White are in their mid-twenties. They recently got married and bought a house, and they plan to have children in the next few years. They want to make sure that if either or both of them were to pass away unexpectedly, the surviving spouse and children would not struggle financially. They each purchase a 30-year term policy so they’ll be covered until their mid-fifties, at which point their children will be independent adults, the mortgage will be paid off, and they will have enough in savings that they will no longer need life insurance to provide for each other.
Have more questions? Contact us to discuss term insurance and if it is right for you!
Tips From First Foundation
Depending on the policy you choose, term insurance premiums may be level, or they may increase as you get older. Renewable term policies automatically start over when the term ends; if you had a five-year term policy, you would automatically be enrolled in a new five-year policy (possibly with higher premiums to account for your increased age) in year six.
Some term policies are convertible, meaning that you can later exchange them for a permanent policy without going through medical underwriting again. This feature can become useful if you develop a health problem that would make it expensive or impossible to get a new policy and you want a policy that won’t expire. Guaranteed convertibility typically expires at age 65 or 70, since you become a much higher risk to the insurance company when you reach those ages.
Once you reach age 70, it may not be possible to get term insurance even if you are healthy, and once you reach age 80, most policies are no longer renewable.