Term life insurance
What is term life insurance?
Term life insurance is precisely what the name implies: an insurance policy that is good for a specific term of time. That term may be 10, 20, or even 30 years, but once that period of time is over, the policy is no longer in effect.
Term life insurance has a variety of benefits and advantages, including:
- It is easy to understand. All you need to know is that you are paying for a specific amount of life insurance for a specific period of time, and that your heirs will receive the agreed-upon amount in the event of your death.
- Biggest bang for your buck. With a term life policy, you can acquire the largest death benefit for the lowest premium.
- The best option for temporary life insurance. If you are shopping for coverage to cover you until you are older and presumably have more money put away, term life is likely your best choice.
- Youth is a benefit. The younger you are, the less expensive the policy.
- Conversion potential. Some term policies can be converted to whole life if your needs change.
- Heirs can skip probate. Unless the estate is named as beneficiary, life insurance proceeds are not part of the probate estate and can be paid to beneficiaries without delay.
- Privacy. There is no public record of how much your life insurance paid out or who your beneficiaries are after your death.
- Likely no federal taxes. Unless your estate is worth more than $5.4 million (as of 2017), payouts from life insurance are not taxed by the federal government. State laws regarding estate taxes vary.
- Potential collateral. If you have good credit and a creditor can safely assume your debt will be paid unless you die, lenders will sometimes accept life insurance as collateral on a loan.
Whereas term life is purchased for a fixed period of time, whole life is designed to provide “living benefits,” including cash value accumulation, the ability to earn dividends, and access to the cash value of the policy through a loan or partial surrender.
There are two features term and whole life have in common:
- Both offer a guaranteed death benefit.
- Both are generally free from federal income tax.
Example of term life insurance
Term life insurance is perfect for those who need life insurance for a fixed period of time. For example, if your family is growing, term life can be a way to take care of them in the event of your death.
Be sure to choose a term life policy that will cover you until you feel confident that you will have enough money to take care of those left behind when you die.
If you are straining to buy enough insurance to cover your family’s financial needs, do not allow someone to talk you into a more expensive whole life policy.
Use our free calculator to figure out how much money you will need to retire.