What is Term Life Insurance?
Term life insurance is a contract between you and an insurance company that has a fixed premium for a defined time frame, or term.
Three Key Attributes
Term life insurance offers many potential benefits. Three of it’s most important attributes are:
- It’s relatively easy to understand. There’s no cash value to consider and no surrender charges if you want to end it. A basic policy works like this: you pay the premium in exchange for coverage. If you stop paying the premium, the policy terminates and your coverage ends.
- It costs less than permanent life insurance. With permanent life insurance, a portion of the premium goes to pay for the insurance coverage and another portion goes to a cash value component intended to help keep the policy in force for one’s entire life. Because term life insurance doesn’t have that second cash value component, it costs less than comparable permanent life insurance
- The cost stays the same during the initial term of coverage. Term life insurance can be purchased for different lengths of time. Common terms are annual, 5, 10, 20, and 30 years. During the initial term of coverage, the premiums stay the same even though you’re getting older and are statistically more likely to die.
One Potential Drawback
These are all positive attributes of term life insurance, but there’s also at least one big potential drawback: after the initial term ends, term life insurance can get really expensive. This happens because of three things:
- You’ll be older – potentially 20 or 30 years older.
- The new cost will be based on your age at that time.
- Insurance tends to cost more the older you are.
The combination of these three things can sometimes cause the coverage to become so expensive that it is no longer affordable. To help address the future risk of potentially not being able to afford your coverage, some term policies are convertible to permanent policies.
Term Life Insurance at Work
Even if you’ve never purchased a term life insurance policy on your own, you may have had term life coverage if you ever worked for an employer who offered life insurance coverage as a benefit of employment.
This is because most employer-provided life insurance is what’s called group term. Group term can be a great source of coverage given its relatively low cost (it’s even cheaper than purchasing a term policy on your own in most cases), but the downside is in most cases, when your employment ends, the coverage does as well.
Servicemembers’ Group Life Insurance (SGLI) is the military’s group term life insurance. Default coverage is $500,000 for about $30 per month.