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What is Term Life Insurance, and How Does it Work?

Happy family sitting together

Term life insurance is the most affordable form of life insurance. It provides coverage for a specific period, typically 10 to 30 years. A contract between you and an insurance company is established which, as long as you pay your monthly premiums, should you die unexpectedly, a death benefit will be paid to your beneficiaries – generally the spouse or children, but any individual, organization, or charity can be named as a beneficiary.

The advantage of term life insurance is that the monthly premiums are less costly than the premiums for whole life insurance. The amount you pay monthly may be a set, unchanging amount for a period of years. These policies are often ideal for younger people who want to ensure their loved ones will not endure financial stress if one spouse dies. The death benefit paid is not subject to taxation and issued to the beneficiaries quickly. The cash paid out on the policy allows loved ones to have the financial resources they need for the future.

Types of Term Policies

You have several choices for term life insurance. For some policies, you will need a medical exam before it will be issued. The exam is usually performed in your own home. It will involve measuring your height, involves height, weight, vital signs, pulse, blood pressure, along with blood and urine samples, and lifestyle questions.

Policies that do not require medical exams come with higher monthly premiums, or a lower death benefit, but are an excellent option for those who have a health condition and may not be approved for other policies. If you are generally healthy, a policy that requires a medical examination is usually a much better option. Other options for term life include:

  • Level term: The premiums remain at the same level until the end of the term.
  • Group term: Some companies offer term life insurance to their employees, which is usually very affordable.
  • Renewable term: A policy with renewable term allows you to renew the policy for another term, regardless of the current state of your health.
  • Convertible term: A term life insurance policy that can be converted to permanent coverage, often without a health exam.
  • Decreasing term: The premiums on these policies are set, but the death benefit decreases over time.

How Much Term Life Insurance Do You Need?

To calculate the amount of term life insurance coverage you need, add an amount that includes ten times your yearly salary, the cost of college tuition for any children, the cost of paying off your home mortgage and vehicles. The more term life coverage you can afford, the better the financial situation for your family. The simplest calculation is to simply plan on 30 times your yearly salary.

Converting Term Life Insurance to Whole Life Insurance Later

Many term life insurance policies can be converted to whole life insurance. When shopping for life insurance, a convertible policy is usually the best option. A young family may not yet be ready to afford the cost of whole life insurance premiums, but within a few years, can convert the policy to a whole life policy. These policies are better than term life insurance, as they build cash value and provide coverage that usually will not expire, building an asset from which you can borrow if needed.

Shopping for Term Life Insurance

While you have the option to find term life policies online, it is recommended that you speak with a local insurance agent, who can guide you to the most reputable insurance companies, and policies with the highest death benefits and most affordable monthly premiums.

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