What is Term Life Insurance?

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Term life insurance is simple and affordable. It is also the most popular type of life insurance.

This type of life insurance lasts for a specific amount of time, or term, before it expires. For those of you getting familiar with life insurance, you may be asking why would I go with a policy that is going to expire? Let’s find out.

Term Life Insurance Defined

Term life insurance will pay money to your beneficiaries in the event you pass away during the term of the policy. This type of insurance solely benefits your beneficiaries (ie: spouse or child) and provides them with financial protection during the length of the term.

There are three major components to this policy:

  1. Death benefit: A lump sum of money paid to your beneficiaries in the event of your death. Typically, stays the same.
  2. Term: Length of time the life insurance policy is valid, commonly 10, 20 or 30 years
  3. Premium: Amount of money the policyholder must pay either monthly or yearly. Typically, stays the same.

Term life insurance is a contract between the policyholder and the insurer. As long you pay your premiums, the insurer will payout the death benefit to your beneficiaries.

You choose your beneficiary. Typically, it is a spouse or child, but it can be anyone you choose. It can even be a trust fund or non-profit organization. You can have multiple beneficiaries ie: spouse, parents and children. The payout can be divided equally or distributed as you see fit.

How to Choose the Right Term Life Insurance?

Before you buy term life insurance, it is very important to get familiar with your current and future financial obligations. This will allow you to know what coverage you will require.

How much money does my family require to cover expenses in the event of my death?

  • Funeral costs
  • Debt (credit cards, car payments…)
  • Mortgage
  • Household expenses (bills, food, clothing…)

How much money will my family need long term?

  • College Tuition
  • Retirement
  • Medical Bills

Once you understand your family’s financial needs, choose a term life insurance with coverage that will pay off your debts and financial obligations. Then choose a term length in which your family will be paying those bills.

For example: If you have 20 years left on your mortgage and your kids are in elementary school. Choosing a life insurance policy with at least a 20 year term would be a smart choice for your family. Ideally in 20 years, your mortgage will be paid off, your children will be financially independent and your spouse will have enough savings for retirement.
To simplify matters, you can compare the best quotes on Wealtha’s term life insurance calculator.

Pros vs Cons of Term Life Insurance

The most important benefit of life insurance is that it is a financial safety net for your family. It is a guarantee that if you die, your family will get a lump sum of cash that can be used for anything they would need.

But let’s break down the benefits of term life insurance in particular:

  • It simple and straightforward. You pay your premiums and then your family gets cash if you die. It may not feel straightforward right now, but when you compare with permanent life insurance, it really is.
  • It is the cheapest life insurance particularly if you buy young. If you are a young and healthy adult, premiums are very affordable. Of course, as you get older, premiums do go up.
  • You have options when it comes to your premium cost. If you choose a bare minimum coverage, your premiums can reduce significantly.
  • You can cancel the policy before it expires. If you do, you won’t lose as much money compared with permanent life insurance since the premiums are lower.

Of course, there are also drawbacks on term life insurance:

  • The most obvious is the life insurance policy expires at some point. If you buy a 30 year policy at 25, when you turn 55, you are no longer covered. You can buy into a new policy but with age and health, the policies become more expensive.
  • There is no cash value for term life insurance. If you stop paying the premiums you can’t cash in the policy to get money back. As well, you will not get any of your premiums back once the term has lapsed.
  • If you are looking to be covered until the day you die or be covered until your retirement and then cash in, a permanent policy may be a better fit for you. However, due to the significant drawbacks and high cost of permanent, we recommend term life insurance for most individuals.

Compare the best quotes online at Wealtha’s term life insurance calculator.

Should I Buy Term Life Insurance?

Life insurance is a personal choice. However, if there is anyone in your life that depends on you financially, we definitely believe term life insurance is worth it. There is no way to know what is around the corner for any of us. Making sure that your family will be ok financially without you  needs to be a top priority.

Term life insurance is the best way to go. It is simple and cheap, working well with your current financial budget and future financial needs.