What is Term Life Insurance?

Term life insurance is the simplest form of life insurance policy to provide financial protection for your loved ones. If you pass away while the policy is active, your beneficiaries receive a death benefit, typically tax-free, helping them cover expenses like debts, living costs, or future plans.

How Does Term Life Insurance Work?

If you’re thinking of investing in term life insurance to financially secure your beneficiaries, it’s important to know how it works exactly. Typically, the term life insurance is a contract between you and your insurer.

First you define the duration of your term life insurance policy, which is typically between 5 years to 30 years. If you want, you can even opt for a longer-term life insurance policy of 40 or 50 years.

Once you determine the duration of the term life insurance policy, you choose the types of coverage and periodically pay the term life insurance premium till the specified duration. For example, if you have agreed to a specified term life policy duration of 30 years, you will have to pay your premiums on a monthly, quarterly, semi-annual, or annual basis.

If you die any time within these 30 years, your beneficiaries can claim insurance and get the death benefit. Here’s the catch though, if you outlive the policy term, no one will get the death benefit, and the premiums you’ve paid are non-refundable unless you’ve return of premium coverage.

While exploring term life insurance, it is essential to find a reliable insurance provider that offers affordable premiums. If you’re looking for an affordable insurance agency in Michigan offering cheap term life insurance policy, you should explore PLPD’s wide range of coverage options. Additionally, if you need advice, or help, you can contact or visit your nearest PLPD Insurance office.

Types of Term Life Insurance Coverage

There are several types of term life insurance coverage, each designed to fit different financial goals and needs. The type of policy you choose determines how long your coverage lasts, how your premiums are paid, and what options you have when the policy term ends. Here are the five common types of term life insurance that you can purchase to create a financial safety net for your loved ones.

Level Term Life Insurance

Level term life insurance is the most common type of term policy. It features a fixed premium and a fixed death benefit that remain the same throughout the entire term, whether it’s 10, 20, or 30 years. This makes it predictable and easy to budget your premiums over time.

One of the main advantages of level term life insurance is stability. Your rates won’t increase as you age or if your health changes. You can choose to pay your premiums monthly or annually, depending on what fits your budget best.

Annual Renewable Term Life Insurance

Annual renewable term life, or yearly life term life insurance coverage, is a temporary life insurance policy that covers you for a year. While you have the option to renew it each year, even without a medical exam. However, the insurance rate of the annual renewable coverage increases with age, especially due to increased risk of health issues and death.

Typically, this coverage is feasible to ensure providing death benefits to your beneficiaries by paying your premiums on a short-term basis, which could even be for a year. Initially, your premiums may be slightly lower than level term insurance, but it is likely to be significantly higher in the long run.

Increasing Term Life Insurance

If you want to increase your death benefit over time, either to match inflation or to provide a higher payout to your beneficiaries in the upcoming years, you can opt for increasing term life insurance.

Depending on the conditions of your term life insurance policy, your premiums may increase over time, stay fixed, or even fluctuate with a predetermined increase in death benefit. Typically, the increasing term life will either increase by a certain percentage every year, or it will increase by a flat rate after a year or a few years.

Example 1: Percentage-Based Increase

Let’s say you purchase an Increasing Term Life Insurance policy with:

• Initial death benefit: $200,000
• Annual increase: 5% per year
• Policy term: 20 years

Here’s how the death benefit grows over time:

Result: After 20 years, your death benefit has grown from $200,000 to more than $530,000. However, your premium may also increase over time to match the higher benefit amount.

Example 2: Flat-Rate Increase 

In this version, the death benefit increases by a fixed dollar amount each year instead of a percentage.

• Initial death benefit: $200,000
• Flat increase: +$10,000 per year
• Policy term: 20 years

Result: Your death benefit grows steadily by $10,000 each year until it reaches $400,000 by the end of the 20-year term. Again, your premium may rise gradually to reflect the larger payout amount.

Decreasing Term Life Insurance

The decreasing term life insurance is a term life insurance policy with a decreasing death benefit over time. While the death benefit gets smaller, your insurance rate remains the same throughout the policy term, but it comes at a lower rate compared to level term and other term life insurance coverages.

This type of policy is often used to cover financial obligations that shrink over time, such as a mortgage or other long-term loans. The death benefit typically decreases by a fixed percentage or dollar amount each year, aligning with your declining debt balance.

Convertible Term Life Insurance

Convertible term life insurance allows you to change your term policy into a permanent life insurance policy, such as whole life or universal life, without taking a new medical exam. However, the conversion must typically occur before the policy term ends or before you reach a certain age, often 70.

This coverage is mainly beneficial if your health declines or your financial goals change, and you want lifelong protection. While premiums for permanent coverage are higher than term life insurance, the conversion lets you maintain coverage without requalifying based on health.

Additional Term Life Insurance Coverages to Consider

If you want a more tailored term life insurance plan, there are optional coverages that provide extra benefits to meet specific financial needs. Here are some additional term life insurance coverages that can be useful to align with your long-term financial plans.

Modified Term Life Insurance

Modified term life insurance is a type of term life insurance coverage that initially provides death benefits at a lower premium, particularly in the first few years, and then increases on an interval basis; usually after 5 to 10 years.

During the initial phase, you may even have a lower death benefit coverage, as you have acquired the coverage at a lower premium. The modified term life insurance coverage is particularly beneficial if you can’t afford premiums at a higher rate for the time being, and if you’re expecting your income to increase in the future.

Return of Premium (ROP) Term Life Insurance

By default, if you outlive the term life insurance policy period, you don’t get the premiums you’ve invested over time. This could be a huge financial loss unless you have the Return of Premium Term Life Insurance coverage.

The ROP term life insurance coverage will provide you with a partial or full refund of the premiums that you’ve paid during the policy term. However, this coverage comes with significantly higher premiums as you’re getting an additional benefit of recovering your long-term investment.

No Medical Exam Term Life Insurance

Getting a traditional term life insurance policy often requires medical tests, health questionnaires, and reviewing past prescriptions or records, which can be time-consuming and inconvenient. To simplify the process, many insurers offer no medical exam term life insurance.

With this type of policy, you can apply without a full medical exam, though you may still need to answer a few health questions for a quick evaluation. The convenience comes at a cost: premiums are generally higher to account for the insurer’s increased risk.

Group or Supplemental Term Life Insurance

Group or supplemental term life insurance coverage is an employer-sponsored term life insurance policy. When a business pays term life insurance for its employees, it is often to cover multiple people.

So, as this policy is purchased by your employer, that’s why it’s called supplemental and as it covers multiple or several employees in your organization, it is also known as group term life insurance.

While some employers may fund the coverage as a business allowance, others may provide an option for their employees to purchase term life insurance through the company based on payroll deductions on a monthly or annual basis.

Do You Need Term Life Insurance?

Life is uncertain; you never know when the inevitable may happen. Whether you’re young and healthy in your 20s or passing your 50s, it is essential to consider investing in a term life insurance policy to financially secure the future of the ones you care about.

If you do, then yes, you should consider getting a term life insurance plan. Apart from the aspect of financial security, if you have a mortgage or co-signed debts, you should consider having term life insurance to pay off any long-term loans after your unexpected passing.

Pros and Cons of Term Life Insurance

Before deciding to purchase or renew your term life insurance, it is important to evaluate its pros and cons to determine whether it’s aligned with your long-term financial goals. The table below shows the benefits and drawbacks of term life insurance to help you make an informed decision.

Final Remarks: Is Term Life Insurance Worth It?

Whether term life insurance is worth it mainly depends on your current age, health, and, most importantly, your financial condition. If you’re young, typically between your 20s and 30s, with a stable health condition and income, you should consider getting a term life insurance policy.

The term life insurance can be particularly beneficial as it’s a temporary insurance policy for a specified period of your choice with relatively much lower premiums compared to a whole or universal life insurance policy.

It provides death benefits to your beneficiaries to cover living expenses, debts, and future goals after your unexpected passing. So, if you want to create a stable and reliable financial safety net for your loved ones with a frugal investment plan, term life insurance is definitely worth it.

If you need help choosing the right term life insurance coverage, contact us now to get a free quote and take the first step to protect your loved ones today!

Frequently Asked Questions (FAQs)

What is term life insurance and how does it work?

Term life insurance provides a death benefit to your beneficiaries if you pass away during the policy term, which is usually 10, 20, or 30 years. You pay regular premiums, and if you die within the term, your beneficiaries receive the benefit, typically tax-free.  

If you outlive the term, the coverage ends, though some policies allow renewal or conversion to permanent insurance. Term life is popular for its affordability and simplicity, making it ideal for covering temporary financial needs like mortgages, education, or income replacement. 

Do you get your money back at the end of term life insurance?

No, the standard term life insurance coverage does not provide any refund on premiums if you outlive your policy term. However, you can get a partial or full refund after the term life policy matures by having the return of premium add-on coverage. 

At what age should you stop term life insurance?

It would be ideal to cancel your term life insurance policy by converting or switching to any permanent life insurance policies when you’re in your 50s, 60s, or 70s, especially when you have no debt or big loans like mortgages. However, if you develop a chronic disease that can lead to an early demise, you should consider keeping the term life insurance coverage, especially if you’re on a tight budget plan.