Does the phrase “term life insurance” ring a bell? For some, it may draw a blank stare. But for many breadwinners, term life insurance is a key purchase to make sure their family finances remain viable.
People buy term life insurance primarily for risk protection, rather than as an estate planning instrument. This type of insurance is designed to replace your income if you die during the terms of the policy so your family will have money to use for debt, health care, housing, education and other needs.
Term life insurance, unlike some other forms of insurance, promises you a fixed premium with a guaranteed claim payout over the specified lifetime of your coverage – provided you pay your monthly premiums.
The most common terms are for 10, 15, 20 or 30 years of coverage. But, you may be able to buy a term of only one year. To calculate the cost of your monthly premium, insurance actuaries use a mortality table (the probability that you will die and your beneficiary will file a death benefit claim) while your policy is in force. Cost factors include your age and personal health history, as well as the term and payout you select. For some policies, no medical exam is required to qualify. Common payout benefit amounts include $50,000, $100,000 or $150,000.
Typically, term life insurance premiums are considerably lower than other forms of life insurance because the policy often expires without a payout and because it doesn’t build cash value. However, your monthly premium is guaranteed to remain at a fixed amount for the duration of the policy. And income from a death benefit payout is tax free.
Once the set duration of your term life insurance policy ends, it’s up to you to choose whether or not to renew it. To renew it, you may need to provide proof of insurability to demonstrate that your health has not deteriorated significantly or you have not acquired a terminal illness during the policy term. However, some policies feature a guaranteed re-insurability feature. At any rate, you can expect the monthly premium you had paid to be raised when you renew.
Bottom line: Term life insurance provides a level of financial security to your family for a relatively small monthly payment.