Term life insurance explained
Term life insurance provides coverage for a certain time period. It’s designed only to protect your dependents in case you die prematurely. If you have a term policy and die within the term, your beneficiaries receive the payout. The policy has no other value.
You choose the term when you buy the policy. Common terms are 10, 20 or 30 years. With most policies, the payout, called the death benefit, and the cost, or premium, stay the same throughout the term.
When you shop for term life:
- Choose a term that coincides with the years you’ll be paying the bills and want life insurance coverage in case you die early. The term of your mortgage is a good indicator of what the term can be.
- Buy an amount your family would need if you were no longer there to provide for them. The payout could replace your income and help your family pay for services you perform now, such as child care. Again the balance on your home if you have a mortgage should be factored in.
Ideally, your family’s need for life insurance will end around the time the term expires: Your kids will be on their own, you’ll have paid off your house, and you’ll have plenty of money in savings to serve as a financial safety net or to supplement your pensions.
Cost comparison between Term and Permanent Insurance
Term life insurance is cheap because it’s temporary and has no cash value; in most cases, your family won’t receive a payout because you’ll live to the end of the term. Whole life insurance premiums are much higher because the coverage lasts for a lifetime, and the policy has cash value, with a guaranteed rate of investment return on a portion of the money that you pay.
Below are price comparisons between term life and whole life insurance. We used 20-year and 30-year term life policies because no apples-to-apples comparison is possible for the length of term life to whole life.
Choosing between term and whole life insurance
Term life is sufficient for most families who need life insurance, but whole life and other forms of permanent coverage can be useful in certain situations. Such as:
Choose term life if:
- You need life insurance only to replace your income over a certain period, such as the years you’re raising children or paying off your mortgage
- You want the most affordable coverage
- You think you might want permanent life insurance but can’t afford it. Most term life policies are convertible to permanent coverage. The deadline for conversion varies by policy.
Choose whole life if:
- You want to provide money for your heirs to pay estate taxes.
- Without a life insurance payout, your heirs might be forced to sell off parts of the estate, such as heirlooms or property, to pay the tax bill. Converting these assets into cash may not be timely.
- You have a lifelong dependent, such as a child with special needs. Life insurance can fund a special needs trust to provide care for your child after you’re gone. Consult with an attorney and financial advisor if you want to set up a trust.
- You want to spend your retirement savings and still leave an inheritance or money for final expenses, such as funeral costs. With a whole life policy, your beneficiaries get a payout no matter when you die.
- You want to equalize inheritances. If you plan to leave a business or other property to one child, you could use whole life insurance to compensate your children