How does term life insurance work?
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.
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.
Do I have to pay the premiums for the full term?
To keep your policy in-force/active, premiums must be paid over a specified term. (These 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.
What happens at the end of the term?
The majority of term insurance policies are “guaranteed renewable.” What this means is that after the term ends, you can keep the policy as long as you are willing to pay the increased premiums. Every life insurance policy comes with an “illustration” that shows what the cost of the policy is after the term period ends.
Below is a copy of my personal term life insurance policy. I bought a thirty-year, one million dollar term policy, and as you can see, the annual premium is $2,932.49. On the thirty first year the annual premium jumps to $106,545.00.
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.
Note: You need to convert the policy BEFORE the term period ends.
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.
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.
