Term life insurance is something you’ve probably heard thrown around, either by your HR person or in TV commercials. But chances are, you still may not know entirely what a term life insurance policy is, or how it works.
Thankfully, it’s pretty easy to break down everything about making your term policy work. Here’s what you need to know:
What is term life insurance?
A term life insurance policy is a safety net for your family in case you die prematurely. This policy is meant to replace your income and provide for your family in the event of your untimely death.
To keep your policy in force, premiums must be paid over a specified term. (Thes terms are usually over a period of 10, 20, or 30 years.) The longer the term on your policy, the higher your premiums will be. As long as your premiums are current and you pass away within the term, you’ll receive the death benefits. So, if you die after the term has expired, then there is no benefit that will pay out.
Term life is also referred to as “pure life insurance.” This is because it only carries the death benefit, without any of the cash value or stock market components that accompany other permanent policies. Though, it does offer the potential for other add-ons and riders if the insured so chooses.
What are the types of term life insurance:
Within the realm of term life policies, there are a few different policy types that will change the way your policy works. Here’s what they are:
- Level Premium
A policy where your premiums will stay the same over the term of your coverage. You can renew your policy at the end of the term, but the premiums will begin to steadily rise.
- Yearly Renewable Term
This is coverage that is renewable after a term, whether it’s a year, five years, or longer. It will stay in force, even if the insured would otherwise be rejected applying for a new policy. Then, like most other term policies, the premiums are then based on the insured’s age and health.
- Return of Premium
This policy will pay the premiums back to the insured if they outlive the term of their policy. The hitch here is that premiums for this kind of policy cost three times more than other term policies.
- Living Benefits
A rider, or add-on, to a term policy which allows an insured to access their benefits in the event they diagnosed with a chronic or catastrophic illness. This way an insured can use their death benefits to help pay large medical bills, even before they pass away.
- Decreasing Term Life
A term life insurance policy where the benefits steadily decrease over the course of the term. These decreases generally happen at either annual intervals or a few months at a time.
- Guaranteed Level:
This policy boils down to a guarantee that an insured’s premiums and coverage will remain the same for the duration of the term.
- Non-Guaranteed Level
Unlike a guaranteed level policy, this policy only guarantees stable premiums and coverage for part of the term, and runs the risk of fluctuating after that point. You’ll want to keep an eye out for a provision like this in your policy.
- Group Term Life
Group term life insurance is the kind of coverage your would though an employer. For this reason, it’s usually a more cost-effective option versus buying your own individual life insurance policy.
How does term life insurance pay out?
No matter what kind of policy you go with, the process is still the same. If you pass away within the term your insurance is in force, then your family gets the death benefit of your policy. But, even that has some caveats to it as well. Instances of suicide, illegal acts, acts of war, or fraud, among others, can result in a policy not paying out.
Now, there are exceptions, such as an insured who is diagnosed with a terminal illness. In that case, the insured is entitled to a portion of their policy’s death benefit, which will vary based on the insurance provider. Whatever portion of the benefit is left when they pass away will be available to their beneficiaries.
Barring these otherwise unforeseen circumstances, beneficiaries will receive a payout from the insurance companies after they file a claim. They’ll need the death certificate to prove that you, the insured, have actually passed away. After that, they can then receive the death benefit as either a one-time lump sum or as an annuity.
Is term life insurance convertible?
Many policies come with conversion riders that allow insureds to convert their policy from term to permanent without having to do a further medical exam. This way, if you decide you would prefer to have longer lasting coverage rather than over a specified term, you can change over your policy.
This kind of rider is particularly helpful in situations where the insured wouldn’t be eligible for a new policy. Situations where they are diagnosed with a late-stage form of cancer or another medical condition. This way they can keep their policy in force for much longer than the original term. Even if you aren’t sure about it when you get your term policy, it is an important rider to consider for the future of your policy.
When is the best time to get a term policy?
There’s no one specific time that is best for buying term life insurance, so you can buy it whenever you are best prepared for it. While single people may not need a life insurance policy, experiencing life changes, like marriage or having a child, may make them want to get a term policy. And if you’re considering a policy, True Blue Life Insurance has plenty of tools to help you find the best term life insurance policy.
In the end, a term life insurance policy is there to make sure you’re protecting your family and taking care of them, even if you die suddenly. Understanding how your term life insurance works is the first step toward protecting their future.