T erm life insurance is similar to other forms of insurance, such as auto or homeowner’s insurance. With all three of those types of insurance, you gladly pay it and hope and pray you won’t need to access it.
Term life insurance is not the same as whole life insurance. Whole life insurance provides a payout upon the eventual death of the policyholder no matter how long they live. Term life insurance only covers the policy term, such as 10, 15 or 20 years. Once that period is over, the policy can be renewed, or it no longer provides financial coverage in the case of the policyholder’s death.
The Key Components of Term Life Insurance
Here is what you should learn about term life insurance, the perfect description of such policies are:
- As stated above, term life insurance guarantees payment to declared beneficiaries upon the insured’s death during the period stated in the policy.
- Premiums are determined based on the insured’s age, health, and life expectancy.
- Policies usually serve a period of 10, 15 to 20 years. You can buy term life for as few as five years or as many as 30.
- Different insurance companies have different rules regarding the payout of term life insurance policies. They also offer different amounts of coverage, which impacts the cost of the premiums.
How Term Life Insurance is Different From Whole Life Insurance?
There are two major differences between term life insurance and whole life insurance.
- Whole life insurance covers the remainder of the policyholder’s life, assuming that the premiums are paid correctly. Term life insurance covers only the policy term, up to 20 years.
- Term life insurance policies provide no savings component. The policy amount is what will be paid out at the time of policyholder’s death. Whole life insurance accrues interest over time. Depending on how long the policyholder lives, the payout could be substantially more than the initial coverage.
Why, then, would anyone buy term life insurance instead of the whole if the whole accrues value over time?
The answer is that whole life insurance is more expensive than term and much more in some cases. Term life insurance is considered financial coverage for family members should the policyholder pass away, and whole life insurance is more of a savings and investment vehicle.
Other Reasons to Buy Term Life Insurance
Because term life insurance only covers a certain number of years, it has limited value. But that does not mean it’s a worthless purchase.
The best reason to buy term life insurance is to provide coverage for family members if the family’s primary financial provider passes away. It is vital in the case of single-parent families. A young widow or widower with school-age children will find term life insurance value, and itt can protect the children’s financial needs in case of unexpected death.
There is a peace of mind that comes from knowing your family will be financially protected if you can no longer provide for them.
Buying term life insurance now is the best idea. Something might happen to you physically or health-wise that will make it impossible for you to acquire term life insurance. Your health and physical well-being are factors in determining the cost of your term life insurance, and buying it when healthy will save you money.
Who Should I Buy Term Life Insurance From?
You have dozens if not hundreds of life insurance companies to choose from. You know which one will provide you with the best coverage at the lowest cost. You also need to know the firm you buy from will pay out your coverage in a timely fashion.
The Better Business Bureau is an excellent place to start when looking up insurance companies. It keeps track of complaints against firms and follows those complaints with reports on how they are resolved.
Five independent agencies track the performance of insurance companies. They are A.M. Best, Fitch, Kroll Bond Rating Agency, Moody’s and Standard & Poor. Use at least two of them to investigate an insurance company. Each rating system uses different standards to determine quality.
How Much Term Life Insurance Should I Buy?
Your goal with term life insurance is to cover family costs if you are no longer there to provide for it financially. Therefore, you want to consider your annual income. Then you want to multiply it by the number of years you plan to insure (say, ten years). That will set the amount of insurance you want to buy.
That is not how much the insurance is going to cost you. But you want to compare premiums from different companies to see which company offers the best deal. The lowest premium may not be the best insurance coverage.