If you're looking for a low-cost, no-frills approach to life insurance, term is the name of the game. Unlike permanent insurance, which is designed to last a lifetime, term insurance provides protection for a limited period of time. Premiums are lower, but there's no cash value when the policy expires.
Term insurance has taken many forms over the years. Most of today's term policies are level term, which means they provide a guaranteed level death benefit and level premium for a selected number of years, for example, 10, 15, 20, 25 or even 30 years.
The key thing to understand, though, is that the guarantee ends after your term period. If your policy doesn't expire, your coverage amount may decrease or the premiums you pay may increase, or both. This is why we typically suggest you consider a combination of term and permanent life insurance.
Given its temporary nature, term life insurance can be ideal for covering needs that won't last forever, such as:
- College costs
- Child-care expenses
- Mortgages and other debts
Selecting Your Term
The longer the level-term coverage period you select, the higher your premium will be for the same amount of coverage. But don't let that price dynamic steer you the wrong way. Lured by lower premiums, many people make the mistake of choosing coverage that's too short for their needs. If their coverage ends before their need does, they may no longer qualify medically for a new policy. And even if they do, they likely will pay more money for the same amount of coverage because they are older.
For example, new parents who need coverage to last until their child graduates from college should consider a 25-year level term policy. It will cost more than a 10-year plan, but having coverage that's sure to last as long as their specific need may justify the higher premium.
Price Isn't Everything
Given the relative simplicity of term insurance, it may be tempting to view all term insurance as the same, but it really isn't. In addition to price, there are three things that differentiate term products:
- Financial strength. Even with 10-year policies, life insurance is a long-term relationship, one that should have a strong foundation. Choose a company with high ratings from independent rating agencies.
- Quality permanent plans. You may never exercise your term plan's conversion privilege, but if your needs change, you'll want to have competitive options to choose from. Favor insurance companies that offer permanent insurance.
- Service to beneficiaries. Remember, you're not buying life insurance for yourself, it's for the ones you leave behind. Ideally, you'll live well beyond your need for term insurance. If not, you'll want the best for your beneficiaries.
|Term Life: Pros and Cons|
|Lower cost means more coverage for the money.||Coverage eventually stops.|
|Conversion privilege guarantees option to switch to a permanent policy later.||The cost of permanent insurance typically increases as you age.|
|Ideal for covering limited-duration needs like a mortgage.||When a term insurance policy ends, there is usually no residual value.|