Considerations, costs, and coverage for term life insurance

Term life insurance gives a death benefit to the policyholder's beneficiaries over a predetermined time period. Once the term expires, the policyholder can renew it for another term, convert it to permanent coverage, or let the term life insurance policy lapse.

How Does Term Life Insurance Work?

When you get term life insurance, the insurance company calculates the premium based on the policy's value (the payment amount) and other characteristics such as your age, gender, and health. Other factors influencing rates include the company's business expenses, the amount it makes from its investments, and death rates at each age. In some circumstances, a medical exam may be necessary. The insurance provider may also ask about your driving record, current medications, smoking status, work, hobbies, family history, and other relevant information.

In recent years, the term life insurance market has seen significant growth, with more consumers recognizing its value as a cost-effective way to protect their families financially. According to industry reports, the global term life insurance market is expected to reach $2.4 trillion by 2028, growing at a CAGR of 6.5% from 2021 to 2028. This growth is largely attributed to increasing awareness about financial planning, rising disposable incomes, and the growing need for financial security in uncertain times.

If you die during the policy's term, the insurer will pay the face value to your beneficiaries. Beneficiaries may utilize this cash benefit, which is normally not taxed, to pay for your healthcare and funeral expenditures, as well as consumer and mortgage debt. Beneficiaries are not compelled to utilize the insurance proceeds to pay the deceased's debts. If the insurance expires before your death or you live over the policy's term, there will be no payout. You may be able to renew a term policy when it expires, but the rates will be recalculated based on your age at renewal.

Cost of Term Life Insurance

Term life insurance is typically the least expensive type of life insurance available because it provides a death benefit for a limited time and does not include a cash value component, as permanent insurance does. According to Insureon data, a healthy non-smoking guy aged 30 may purchase a 30-year term life insurance policy with a $500,000 death benefit for an average of $30 per month in February 2023. At age 50, the premium would increase to $138 per month. Most term life insurance plans expire without providing a death payment. This reduces the overall risk to the insurer when compared to a permanent life policy. Reduced risk is one reason that enables insurers to charge cheaper rates. Interest rates, the insurance company's finances, and state restrictions can all have an impact on premiums. In general, firms frequently provide better rates at the "breakpoint" coverage levels of $100,000, $250,000, $500,000, and $1,000,000.

The COVID-19 pandemic has had a notable impact on the term life insurance industry. Many insurers reported an increase in applications during the height of the pandemic, as people became more aware of their mortality and the importance of financial protection. Some companies even introduced simplified underwriting processes, allowing applicants to obtain coverage without in-person medical exams. However, this trend has led to increased scrutiny of applicants' health histories and lifestyle factors, potentially affecting premium rates for certain individuals.

Example of Term Life Insurance

Thirty-year-old George wishes to protect his family in the improbable event of his premature demise. He buys a 10-year, $500,000 term life insurance policy with a monthly payment of $50. If George dies within the policy's 10-year term, his beneficiary will receive $500,000. If he dies after the policy expires, his beneficiary will not receive any benefits. If he lives and renews the policy after ten years, the premiums will be greater than the original policy because they will be based on his current age of 40 rather than 30. If George is diagnosed with a terminal illness during the first policy term, he will most likely be ineligible to renew when the policy expires. Some policies provide guaranteed re-insurability (without proof of insurability), however these benefits come at a greater cost.

Types of Term Life Insurance

There are various types of term life insurance. The best option will depend on your specific circumstances. Most corporations provide durations ranging from 10 to 30 years, with a handful offering 35 and 40-year contracts.

The rise of insurtech companies has brought innovation to the term life insurance market. These tech-driven insurers are leveraging artificial intelligence, big data, and machine learning to streamline the application process, improve risk assessment, and offer more personalized policies. Some insurtech firms now offer instant quotes and coverage decisions, making it easier for consumers to compare and purchase term life insurance online. This digital transformation is not only making term life insurance more accessible but also appealing to younger, tech-savvy consumers who prefer quick, hassle-free transactions.

Level Term or Level Premium Policy

Level-premium insurance requires a fixed monthly payment for the duration of the policy. The majority of this essay has been on term life insurance, which has a level premium. As previously stated, this sort of policy typically covers coverage for ten to thirty years. The death benefit is similarly fixed. Because actuaries must account for rising insurance costs over the course of the policy's effectiveness, the level premium is significantly greater than yearly renewing term life insurance.

Yearly Renewal Term (YRT) Policy

Yearly renewable term (YRT) policies are one-year policies that can be renewed annually without giving proof of insurability. The rates climb year after year as the covered person aged. As the insured aged, his or her premiums may become excessively expensive. However, they may be a decent solution for someone who requires temporary insurance.

Decreasing Term Policy

These policies feature a death benefit that decreases annually according to a predetermined timetable. The policyholder pays a set premium for the length of the policy. Decreasing term plans are frequently used in conjunction with a mortgage, with the policyholder matching the insurance payout to the decreasing principal of the home loan.

Environmental, Social, and Governance (ESG) considerations are becoming increasingly important in the insurance industry, including term life insurance. Some insurers are now offering "green" term life insurance policies that invest premiums in environmentally friendly projects or companies with strong ESG ratings. Additionally, some insurers are exploring ways to incentivize healthier lifestyles among policyholders, such as offering premium discounts for meeting fitness goals or maintaining a healthy diet. These initiatives not only align with growing consumer demand for socially responsible products but also potentially reduce risk for insurers by promoting better health outcomes among policyholders.

Advantages of Term Life Insurance

Term life insurance appeals to young individuals with children. Parents can acquire comprehensive coverage at a cheap cost, and if the insured dies while the policy is active, the family can use the death benefit to replace lost income. These policies are also appropriate for individuals with growing families. They can keep the necessary coverage until, say, their children reach adulthood and become self-sufficient. A term life benefit may be equally beneficial to an older surviving spouse. However, persons who wait until they are older to apply for insurance will pay greater rates than if they had purchased a level-term coverage when they were younger. Each insurance company has a maximum age for its term life coverage. This typically spans from 80 to 90 years old.

Term life insurance versus permanent life insurance. The primary distinctions between a term life insurance policy and a permanent insurance policy (such as whole life or universal life insurance) are the policy's duration, the building of cash value, and the cost. Your preferences will determine which option is best for you. Here are some factors to consider.

Premium Costs Term life insurance policies are suitable for customers who desire a lot of coverage for a reasonable price. People who hold whole life insurance pay more premiums for less coverage, but they know they are covered for the rest of their lives. People who get term life insurance pay premiums for an extended period of time but receive no benefit unless they die before the term finishes. Additionally, term life insurance premiums rise with age.

Availability of coverage Unless a term insurance is guaranteed renewable, the business may refuse to renew coverage at the conclusion of its term if the policyholder develops a serious illness. Permanent insurance provides coverage for life as long as the premiums are paid, regardless of the insured's health status.

Investment value

Some clients prefer permanent life insurance since the contracts sometimes include an investment or savings vehicle. A percentage of each premium payment is dedicated to the cash value, which typically increases while the policy is in force. Some plans offer dividends, which can be paid out in cash or kept on deposit within the policy. Over time, the cash value may increase to the point where it can cover the policy premiums. There are also various distinct tax advantages, including tax-deferred cash value growth and tax-free access to the cash portion. However, financial counselors warn that the growth rate of a cash-value policy is generally low when compared to other financial products such as mutual funds and exchange-traded funds (ETFs). Also, high administrative fees frequently reduce the rate of return. This is the origin of the expression, "buy term and invest the difference." Permanent insurance, on the other hand, has a consistent performance and is tax-efficient, offering additional benefits when the stock market is erratic.

There is no one-size-fits-all solution to the term vs. permanent insurance argument. Other aspects to consider are: Is the rate of return on investments sufficiently appealing? Does the permanent policy include a borrowing provision and other features that allow you to access the cash value over your lifetime? Does the policyholder own or plan to own a business that requires insurance coverage? Will life insurance play a part in tax sheltering a large estate?

Comparing Term Life Insurance with Convertible Term Life Insurance

Convertible term life insurance is a term life policy with a conversion rider. The rider ensures the opportunity to change an active term policy—or one about to expire—to a permanent plan without going through underwriting or showing insurability. The conversion rider should allow you to convert to any permanent policy offered by the insurance company without restriction. The rider's main features are that it keeps the term policy's original health rating upon conversion (even if you later have health difficulties or become uninsurable) and allows you to choose when and how much coverage to convert. The premium for the new permanent coverage is based on your age at conversion. Of course, overall rates will rise dramatically because whole life insurance is more expensive than term life insurance. The advantage is that approval is guaranteed without requiring a medical evaluation. Medical issues that occur during the term life period cannot cause premiums to rise. If you want to add additional riders to the new policy, such as a long-term care rider, the firm may need either restricted or full underwriting.

Which is better: term or whole life insurance? It depends on your family's requirements. Term life insurance is a low-cost solution to leave a lump sum to your dependents in the event of your death. If you are young, healthy, and support a family, it may be a viable option. Whole life insurance carries significantly higher monthly rates. It is intended to offer coverage for your entire life. As the coverage matures, the policy's value increases, and the policyholder can take funds for any purpose. Thus, it can be used as both an investment instrument and an insurance policy.

Do you receive your money back at the end of a term life insurance policy? If you are still living when the term expires, your term life insurance policy will not pay out. If you die, only your beneficiaries will receive the death benefit. That is why term life insurance is so inexpensive. Most people outlive their term life insurance contracts.

Can a Senior Citizen Get Term Life Insurance?

It depends on their age. Insurance firms establish a maximum age for term life insurance coverage. This is often between 80 and 90 years old, but might vary depending on the company. The premium also climbs with age, so someone in their 60s or 70s will pay far more than someone many decades younger.

Term life insurance is a viable choice for those unable or unable to pay the higher monthly rates of whole life insurance. Term life insurance is similar to vehicle insurance. It is statistically rare that you will need it, and paying the premiums is a waste of money if you do not. However, if the worst happens, your family will receive rewards.