Term Life Insurance
Are you looking for a way to protect your loved ones after your death? If you are, then you may have looked into life insurance policies. Many types of life insurance policies can pay your loved one’s death benefits. One of the most popular is a type of life insurance called term life insurance.
Term life insurance entitles your beneficiaries to death benefits after your passing. However, the entitlement is effective for a limited time. By choosing a term life insurance policy, you can ensure that your loved ones receive a payment if you pass away within the term set in your insurance policy.
In short, term life insurance is one way to insure your beneficiaries or loved ones at the moment of your passing. If you’re interested in buying this type of life insurance, you’ll need to know the ins and outs of term life insurance to make a more informed decision.
By the end of this article, you’ll know everything there is to know about term life insurance and whether or not it’s the right one to choose. Read on to learn more about term life insurance.
What Is Term Life Insurance?
Term life insurance is a type of life insurance that allows policyholders to transfer their wealth and policy contributions to their loved ones at the moment of their passing. The word “term” refers to the duration in which the beneficiaries remain entitled to the death benefits. Hence, in a way, the term acts as an expiration date.
When the policyholder outlives the term, the policyholder has two choices. The policy owner can either renew the policy, or convert it into a permanent life insurance policy that the policyholder can’t outlive.
Term life insurance is one of the most popular types of life insurance because it is cheap and easy to understand. Policyholders pay monthly premiums based on the values of their policies.
The policies have no investment or savings component, making them not only affordable but easy for prospective policyholders to comprehend and buy.
How Long Is a Term Life Insurance Policy Good For?
Of course, term life insurance policies will differ in their terms, depending on the insurance provider you speak with. In general, you can expect term life policies to be effective for anywhere from 10 to 20 years. Some carriers will have policies that last for as long as 40 years.
As was already said, if you outlive the terms of your insurance policy, you have a few choices. You can either extend it or change it into a different policy — one without a term or expiration date.
How Does Term Insurance Work?
To understand how term insurance works, consider this scenario.
Imagine that you were planning for retirement and your golden years. It suddenly crosses your mind to ensure that your loved ones receive something when you pass away. Looking into various life insurance options, you consider term life insurance.
You then purchase a term life insurance policy set at 30 years. So, for the next 30 years, you’ll pay monthly premiums that will give your family money when you die.
For your family to get the death benefits, you must die within the 30-year period stated in your policy. If you die during this time, the insurance policy will pay out death benefits to your beneficiaries.
On the other hand, if you outlive the term set in your policy, you can extend the term. You may extend it for any number of years you see fit or your carrier allows. Obviously, you won’t be able to choose this option if you have a term life insurance policy that doesn’t allow you to renew it.
You can extend the terms of your term insurance policy, or you can change it into a permanent life insurance policy. Doing this is possible if your term life insurance is convertible.
What Are the Different Types of Term Life Insurance?
You’ve probably noticed that not all term life insurance is the same. In reality, there are different kinds of this life insurance policy, and each one has different rules about whether it can be changed, renewed, or converted.
Let’s talk about each in greater detail.
As the name suggests, renewable policies allow you to extend the terms if you’ve lived past the set expiration date. Term life insurance that can be renewed can be extended for as many years as the insurance carrier will allow.
Non-renewable policies aren’t extendable, expiring immediately after the term’s final date. This type of term life insurance is ideal for policyholders who wish to avoid paying premiums for too long. Also, this policy benefits owners with chronic illnesses that may lead to death within the term’s duration.
This type of term life insurance allows policyholders to convert a policy into a permanent life insurance policy after the term life insurance expires.
The best thing about a convertible policy is that policy owners can forego any insurability requirement. In other words, you don’t need to prove your insurability when the time comes for you to convert your term life insurance policy to a permanent life insurance policy.
If you’re healthy and want to pay lower term life insurance premiums, a re-entry term life insurance policy is for you.
Re-entry policies enable you to reduce your premiums. Re-entry policies are often renewable policies that require you to prove insurability. If approved, your “re-entry” into your term life insurance policy will have lower premiums for the same amount of coverage.
Group Life Insurance
Some companies offer term life insurance as part of their employment or retirement benefits. This term insurance policy allows employers to cover their workers and retirees. If you’re unsure whether your company offers this, now is a good time to ask.
Interim Term Life Insurance
You can think of interim term life insurance as “short-term” insurance. It’s short-term in that it’s a gateway policy for when you want to quickly convert your policy to a permanent life insurance policy. Interim term life insurance expires quickly — often, after just a few months. As a result, you can quickly convert it without waiting years for its expiration.
Level Term Insurance
With a level term life insurance policy, your coverage’s face value remains the same throughout the policy’s term.
This term life insurance policy features a decreasing face value. Each year, the policy’s face amount decreases. If you are paying off a mortgage or other large loans, decreasing-term policies are an excellent choice.
Increasing term life insurance has a face amount that increases incrementally every year. It’s ideal if you want additional death benefits for your loved ones. It’s also a great choice if you want to add to other types of insurance you already have.
Tax Implications that Come with Term Life Insurance Policies
One of the most common questions about term life insurance is whether or not it’s taxable. The answer to this question is both yes and no. Let us explain.
Life insurance of any kind represents a personal expense. In other words, it’s something you buy. For this reason, the premiums you pay for life insurance are taxable.
Life insurance, on the other hand, is made up of the premiums that are paid and the death benefits that are given to the beneficiaries. Death benefits do not count as gross income. Hence, when the beneficiaries receive death benefits, they don’t have to report it because it’s not taxable income.
This is especially true for benefits from term life insurance since term life insurance has no investment component.
In short, you’ll have to pay taxes on the premiums for your term life insurance. Nevertheless, you can rest assured knowing that your beneficiaries won’t have to pay taxes in the death benefits from your policy.
What Do You Do When Your Term Life Insurance Expires?
Term life insurance entitles your loved ones to death benefits. Your beneficiaries will receive the benefits if you pass away within the terms of your policy.
With that in mind, the next question you may be asking is this:
“What do you do when you outlive your term life insurance?”
Depending on the type of term life insurance you have, you have two options. Let’s explore both in detail.
Option A: Renew Your Policy
For many policy owners, this is the course of action to take. Renewing your policy involves extending its term. Depending on the policy you have, you may have to present proof of insurability. If you opted for re-entry insurance, you stand to benefit from an extension of your policy with lower monthly premiums.
Renewing your policy may also allow you to change your policy to another type of term life insurance. For example, you’ll be able to turn your level term insurance into a decreasing or increasing level type of term insurance.
Option B: Convert Your Policy
By converting your policy, we mean eliminating timelines to your coverage. More specifically, you can turn your term life insurance policy into a permanent or universal life insurance policy. When you do this, you’ll have life insurance you cannot outlive, ensuring that your loved ones remain entitled to death benefits for a long time.
Of course, the indefinite nature of a permanent or universal life insurance policy comes with a price. Expect to pay higher premiums when you convert your term life insurance to permanent life insurance.
Is a Term Life Insurance Policy for You?
Many types of life insurance are available. However, if any of the following apply to you, a term life insurance policy may be the best option for you:
You Can’t Afford High Premiums
One of the most attractive qualities of term life insurance is that you can acquire significant coverage with affordable premiums. Term life insurance allows you to enjoy stable coverage for as little as $30 a month.
You’re Young and Healthy
With permanent life insurance, you’ll be paying higher premiums regardless of your condition. However, you can lower your monthly premiums and enjoy coverage with term life insurance if you’re healthy.
As mentioned earlier, one way to lower premiums is to show proof of insurability. A significant portion of your insurability is your health. The better you score in this area, the more likely it is that the insurance carrier will lower your premiums.
You’re Supporting a Family
If you have term life insurance, your family may be able to get death benefits if you die. More importantly, you’ll be insuring them at a fraction of the cost compared to if you chose permanent life insurance.
Things to Consider
Despite the features of a term life insurance policy, you must be aware of a few things before you make your decision.
It’s Taxable Unless It’s for Someone Else
When you’re buying term life insurance, the premiums will count as personal expenses. Hence, you’ll have to report these to the IRS. The only time you may not have to pay taxes on term life insurance is if you’re buying it for someone else.
There’s a Time Limit
Term life insurance covers you and your beneficiaries for a limited time. When you outlive your policy’s term, you can renew or convert your life insurance.
Most Don’t Cover You for Accidental Death
In most cases, term life insurance doesn’t provide death benefits to your beneficiaries if you die from accidental causes. For accidental death coverage, you may have to add it as a rider or purchase additional insurance.
Questions About Term Life Insurance?
Term life insurance ensures that your loved ones receive benefits when you pass away. By opting for this type of life insurance, you can receive substantial coverage at affordable premiums.
Term life insurance is for you if you’re looking for an affordable insurance policy that gives you coverage. If you’ve got questions about term life insurance, reach out and ask our experts today.