Understanding Term Life Insurance: 4 Key Considerations
Are you exploring term life insurance? Or do you currently own term life insurance but are wondering whether a permanent policy may be a better strategy? Here are a few things you should know before purchasing a policy.
Term life insurance is a popular and effective way to manage one of life’s most dangerous risks. If you have a spouse, children or other family members who are dependent on your support, life insurance can help them manage their affairs should you pass away. They can use the life insurance death benefit to cover living expenses, pay down debt or address other challenges.
There are many different kinds of life insurance, but most types fall into one of two categories: term or permanent. A permanent policy is guaranteed for life as long as you pay the premium. A term policy provides coverage for a limited period, such as 10 or 20 years.
Term policies are popular because they often cost less than permanent alternatives and because the term policy can be used to cover a specific need. For example, if you have children, you may want a 20-year term policy that provides coverage while your children live in your home. Once the kids are grown and can support themselves, you may not need the coverage anymore.
While term insurance is a fairly straightforward tool, policies can sometimes come with unique variations and wrinkles. Below are four questions you may want to research about your current term policy or any policy you’re thinking about purchasing. The answers to these questions could make a big difference in your decision about whether a term life insurance policy is right for you.
1.) What is the renewal premium amount?
Technically, term policies are in place for a limited period of time. However, many policies offer an opportunity to extend the coverage after the initial period ends. For example, if you have a 10-year term policy, the insurance company may allow you to extend the coverage at the end of the initial 10-year term.
Often this renewal doesn’t require you to undergo new underwriting, which could be helpful if you develop health issues. If you do extend the coverage, however, your premium will likely increase – sometimes substantially.
You may want to explore your renewal premium well in advance of your term’s expiration. It may turn out that you’d be better off buying a new policy than renewing your current one. If you know your renewal premium in advance, you can research alternatives before your term expires.
2.) Is it convertible?
Extending your coverage is one option if you still need protection after your term ends. However, your life insurance policy may offer another option. It’s called conversion, which is the option to convert your term policy into a permanent one.
When you convert your term policy, it immediately becomes a permanent policy, such as whole life or universal life. Your premiums are adjusted to reflect the new permanent coverage. However, a portion of those premiums will go to the policy’s cash value account, which could increase over time.
Conversion can be appealing because it usually doesn’t require new underwriting. Your new premiums will be based on your current age. However, any new health issues aren’t factored into the premium calculation. You will typically be rated at the same health classification as when you bought the original term policy. This could be an attractive option if you may need permanent insurance in the future.
3.) Can you accelerate the death benefit?
Many life insurance companies now offer a feature called an accelerated death benefit. This is an option to take your death benefit before you pass away if you are diagnosed with a terminal illness. It allows you to pay for medical bills, hospice care and other financial issues that may arise in the final stages of your life.
Accelerated death benefits are usually offered on permanent policies, but there are some term policies that also have the feature. It may be worth considering as an added level of protection for you and your family.
4.) Would permanent life insurance be a better option?
Term life insurance can be a useful tool for those who simply need a certain amount of death protection for a specified period of time at a cost-effective price. However, for many people, permanent insurance can provide additional benefits that term doesn’t offer.
When considering a term policy, keep in mind that term insurance is basically like “renting” insurance – you will pay a premium for the specified number of years, and if you don’t die during that time, you (and your family) will receive no benefit for those premiums (other than peace of mind). On the other hand, permanent insurance is an owned asset that can grow in value over time. Not only will your cash value grow as you pay your premiums, but your death benefit can also increase, meaning a bigger benefit to your family when you do pass away. Also, with a whole life policy, the death benefit can last your entire life, even after you stop paying premiums (if properly structured and managed).
Many permanent policies also offer additional riders that provide other useful benefits such as long-term care coverage in case you require care during your senior years, accelerated death benefits such as those mentioned above, and waiver of premium provisions in case of disability.
Both term life and permanent life insurance have their pros and cons. It is important to carefully consider both your needs and your wants when it comes to protection and financial flexibility and security, in order to make the best decision. (Stay tuned, as we’ll be covering more about permanent life insurance later this month.)
Ready to develop an appropriate protection strategy for you and your loved ones? Contact us today – we can help you analyze your needs and goals and create a plan that is right for you.
* Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values.
This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.