Term life insurance
Eighty percent of Americans are concerned about being financially prepared in the event of a premature death, and yet recent Guardian research found that almost 30% do not own life insurance. This guide can help you determine if term life insurance coverage is right for you, how much you should consider, and what you need to know before purchasing a term life policy.
What is term life insurance?
A term life insurance policy is the simplest, purest form of life insurance: You pay premiums for a set 10-year, 20-year, or sometimes 30-year time frame, and if you die during that time, a cash benefit is paid to your family (or anyone else you name as your beneficiary).
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Term life insurance is typically less expensive than whole life or universal life insurance. But unlike those types of permanent life insurance, term policies don't provide lifetime coverage, don't build cash value, and, in essence, have no value other than a death benefit.
Six key questions to consider before getting a term policy:
Should I choose a term life policy over whole life?
How much life insurance you should consider
The answer depends mostly on where you are in life and how many family members rely on your income. While common industry guidelines suggest having coverage equal to 10x your salary, the average working American has between two and four times their salary in life insurance coverage1, which may not be enough, especially for those with families. Generally speaking, the younger you are, the more coverage you'll need to compensate for the years of potential wage-earning ahead of you. And the more family members depend on you, the more coverage you'll want to consider for income replacement if you die.
Among those who have life insurance coverage, many may not have enough to meet their financial needs.
How a term life insurance policy works
A term life policy is a contract between you and an insurance company: You agree to pay a monthly premium for a specific term; in return, the insurance company promises to pay a specific death benefit in cash to one or more named beneficiaries upon your death. Beneficiaries are typically a spouse or child, but they can also be a trust, charitable organization, or even a friend. The death benefit they receive is almost always paid out income tax-free – unless the premiums are paid with pre-tax dollars.
As we’ve noted, these policies provide coverage for a limited term or period of time. As you apply for a policy, you need to decide how long you want coverage to last. If you have children, a popular rule of thumb is to choose a term long enough to see them out of the house and through college. The longer your term, the more you’ll typically pay each month for a given coverage amount. But if you choose a shorter term, you may end up paying more in the long run: when you apply for new term coverage in, say, 10 years, rates will likely be much higher. It’s generally easier and less costly to get insurance while you are younger and in good health.
Most policies require a medical exam during the application process to evaluate your health and learn more about your occupation and lifestyle. Certain hobbies like scuba diving are deemed risky to your health, which may raise rates. Likewise, dangerous occupational environments – for example, an oil rig – also may raise your rates.
The different types of term life policies you can buy
All term life insurance policies provide a guaranteed death benefit over a specific term, but there are different types of term policies with varying features and rate structures.
Level premium | Also called level term, this is the most common type of policy and the simplest to understand: Your premium stays the same for the entire term. |
Yearly renewable term | This policy, sometimes called an annual renewable term life, covers you for one year at a time, with an option to renew without a medical exam at the end of the yearly term. However, the cost can go up with each renewal. Compared to a level term policy, your premiums will be slightly lower at first, but over a full 10, 20, or 30-year timeframe, you will typically pay more than you would with a level premium policy. |
Return of premium | This type of term policy actually pays back all or a portion of your premiums if you live to the end of the term. However, your premiums could be 2-4 times higher than a level term policy. |
Guaranteed issue | These policies don’t require a medical exam and only ask a few simple health questions. However, the insurance company will assume you are a risky prospect, so your premiums may be much higher. Also, the policy might not pay a full death benefit for the first few years of coverage. |
Decreasing term life insurance | This is a specialized type of policy, in which the premium and death benefit payout gradually decrease each year. It is typically used to cover mortgage obligations. |
Many level term policies are also convertible: Convertibility is a policy provision that lets you change your term insurance into a permanent whole life policy later on – without having to get a new medical exam. Guardian enables you to convert level term insurance coverage at any point in the first five years to a permanent life policy and offers an optional Extended Conversion Rider, which lets you do so for the duration of the policy.
Why convert to a whole life insurance policy? If you develop a serious health problem, it could be the least expensive or even only way to extend your coverage. Or, maybe you decide you want the asset-building cash value component of a whole policy or are able to afford permanent life-long coverage as your circumstances change.3
Choosing between whole and term life policies
While term life insurance can provide the most coverage per premium dollar, with this type of coverage there’s a good chance you’ll pay premiums for many years, live to the end of your policy term, and never see a payout. Another insurance option is a permanent policy, such as whole life insurance, which can provide:
Life-long coverage4
A tax-efficient cash value component with guaranteed growth
Tax-efficient access to the policy’s cash value5
Whole life insurance premiums are higher than term, but the policy’s cash value can provide several benefits that you can use while you’re still alive: You can borrow against your policy’s cash value, use it to pay premiums, or even surrender it for cash to help supplement retirement income. With a mutual company, such as Guardian, whole life policies can also earn annual dividends which can further increase your cash value and/or provide other benefits.6 A term policy has no cash value component. Differences between the two types of policies include:
Policy Feature | Term Life Insurance | Whole Life Insurance |
---|---|---|
Initial cost | Typically, lower than whole life | Generally, 6x-10x more expensive than term for the same death benefit; but as cash value builds it can be used to supplement premiums. |
Cost over time | Renewal cost can increase with age | Cost stays the same for life |
Permanent coverage | No | Yes |
Length of coverage | Typically, 10-30 years | Lifetime coverage (as long as payments are made) |
Premium | Can be level or increase over the length of the policy | Level - stays the same every month |
Heath exam required | In most cases | In most cases |
Cost can decrease over time | No | Yes - cost can be offset as cash value builds (typically after 12+ years) |
Cash value | No | Yes - accumulates over time3 |
Ability to withdraw the cash value during life of the policy4 | No | Yes - withdrawals and loans are allowed (but if unrepaid this will diminish the policy values and death benefit) |
Guaranteed death benefit | Yes | Yes |
Policy structure and provisions | Relatively simple | More complex |
How much you can expect to pay for a term life policy
If you’ve determined that term life insurance is the right option for you, the next step is to understand how much you can expect to pay in the form of monthly premiums over the term of your policy. Whatever coverage amount you need, it may cost less than you thought: more than half of Americans overestimate the cost of life insurance three-fold.2 And, since life expectancy affects rates, women tend to pay less for coverage than men because women generally live longer.
Average costs for a $1,000,000 term policy
Male, Age 30 | Female, | Age 30 | |
Term | Cost per month | Term | Cost per month |
10 year | $42 | 10 year | $34 |
15 year | $50 | 15 year | $42 |
20 year | $61 | 20 year | $48 |
30 year | $119 | 30 year | $96 |
How to get term life insurance
Many companies offer group life insurance as part of their employee benefits package, and this is generally a more cost-effective option than buying an individual policy. On the other hand, the total amount of coverage you can get may be limited. For example, you may only be able to get up to three times your salary, and if you leave the company, you could lose your coverage.
Even if you have some coverage through work, it may not be enough for your needs. The good news is that term life insurance is generally easy to shop for. Many companies, including Guardian, will give you an instant online quote.
Compare insurance rates from a couple of sources, and before you make a choice consider the term life insurance company you’re buying from. You’re looking to have a long-term relationship with that company, so look for the following qualities:
Financial strength: You want to be confident that the company will be around when your family needs a payout years or decades down the road. Consider financial strength ratings when evaluating companies.
A company that underwrites its own policies: Some companies sell policies from another insurer, and this can add costs to your premiums. It can also add an extra layer if you want to change your policy – or down the road when your family makes a claim.
Guaranteed term renewability: If you become critically ill near the end of your policy’s term, you’ll want to be able to renew without taking another medical exam. Some companies offer this on a year-to-year basis – and while you can expect your rates to rise substantially, it may be worth it for your survivors.
If you’re not sure what type of coverage is best for you, we can help
In the market for life insurance, but can’t decide between term and permanent life insurance? Guardian can connect you with a financial professional who will listen to your needs and recommend different life insurance options to fit your needs and your budget. But don’t put it off: the longer you wait to get life insurance, the more you’re likely to pay.