Term Life Insurance

Term life insurance provides life insurance coverage for a specific time period (term). It is often referred to as temporary insurance or pure insurance, in that there is no cash value in the policy. The face amount of the policy is paid if you die during the term of the policy. When you live longer than the term of the insurance coverage, nothing is paid.

Caution: Any guarantees associated with payment of death benefits, income options, or rates of return are based on the claims-paying ability of the insurer. Policy loans and withdrawals will reduce the policy’s cash value and death benefit.

When can it be used?

High insurance need, low cash flow

Term insurance is appropriate for situations when there is a high need for insurance but not much cash flow to pay for it. For example, a young family with limited cash resources may have a great need for survivor income to provide for living expenses and education needs. Term insurance is especially helpful here, allowing the family to buy insurance protection with minimal cash outlay.

Short-term coverage

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. Generally, a short-term need is considered to last 10 years or less and may include coverage for nonrecurring business-debt security, key person coverage in a start-up business, or the young family just starting out.

Strengths

Low cost for large death benefit (at least in younger years of life)

Term insurance is generally the most efficient way to achieve maximum life insurance protection for a minimum current cash outlay. When you are young and just beginning your career or family, you may have a need for insurance but not much cash to pay for it. You can usually buy a larger death benefit for less cash with a term policy than you could get with any other type of life insurance policy.

Caution: Term insurance starts out inexpensive when you are young, but the premiums generally increase at each renewal.

Flexible–you can buy policy based on various time frames and features

You can buy term insurance coverage for the time period that best suits your needs. Generally, you can increase your coverage if your needs change and renew your policy for an additional period. Increases in coverage may require new proof of insurability.

Policy Type

Feature

Drawback

Annual Renewable Term Coverage for one-year time frame

Policy automatically renewable each year up to specified age

May have limit on number of renewals Premiums may increase with each renewal

Renewable Term Coverage is for a specific period, usually 5 to 20 years

Policy automatically renewable through end of term with no new application or medical exam, even if health has deteriorated

Renewable for same amount of coverage or same term may not be available. Premiums increase with each renewal

Level Premium Term Coverage is for a specific period, usually 5 to 20 years or until a predetermined age

Premium guaranteed to remain same for policy term

Premiums may increase sharply at end of term when new policy must be applied for

Decreasing Term Used to cover mortgage or other debt where balance decreases over time

Premiums remain level, but death benefit decreases each year over term

General insurance needs tend to increase over time due to inflation

Convertible Term

Allows you to convert term policy to another type of policy offered by issuing company

Premiums usually cost more than annual renewable term

Tradeoffs

Premiums increase at each renewal and get more expensive with age

A term policy has an endpoint, like an expiration date. When the coverage period ends, you may have the option to renew the policy, depending on the specific policy and limitations. Each time you renew the policy for an additional term of coverage, the rate generally increases because your age (and consequently the insurance company’s risk of paying the death benefit) has increased. Eventually, you could be paying more in premiums for term coverage than if you had bought a whole life policy from the beginning. The increasing premium costs can make term insurance expensive for long-term needs.

You can start with convertible term insurance in the early years of your career, marriage, or family. When cash is a little less scarce, convert to permanent life insurance such as whole life, universal, variable, or variable universal.

Most policies automatically terminate at certain age

Most term policies automatically terminate at a certain age, often 65 or 70, and most people will outlive the term of the insurance. Term policies pay a benefit only when you die during the coverage period. When you live longer than the term of the insurance, your beneficiary receives nothing.

There are policies available that are renewable until age 90 or 95. Also, some policies offer a return of premium feature whereby the premiums you paid are returned at the end of the policy term, presuming the death benefit hasn’t been paid. If you want a policy where you can be covered for your entire life or get cash out of the policy at some point, consider one of the permanent, cash value policies such as whole life, variable life, universal life, or variable universal life.

How to do it

Determine your life insurance need and overall financial goals

Before you buy life insurance, you need to know how much insurance you need. Insurance need is based on numerous factors, including your current age and income, marital status, number of incomes in the household, number of dependents, long-term financial goals, level of outstanding debt, and existing insurance and other assets. Your overall financial, estate, and tax-planning goals and your planning horizon should be considered as part of your insurance need evaluation.

Contact Us for more information on determining appropriate levels of life insurance, as some of the calculations can be complicated.