Welcome to an introductory overview on what allied health professionals should know about term life insurance. This article is a must-read if you’re looking to purchase any type of life insurance.
The independent seller of insurance Best Life Rates estimates that 71% of the individuals who owned a life insurance policy in the United States in 2017 owned a term life insurance policy.
This article will give you an overview on what term life insurance is so you can best decide if purchasing a term life insurance policy is actually in your best interest.
Let’s get started.
WHAT IS LIFE INSURANCE?
In the unfortunate circumstance that you pass away, life insurance provides the opportunity to better ensure your loved ones’ financial security.
WHAT TYPE OF INSURANCE IS TERM LIFE INSURANCE?
There are two major categories of life insurance: Term life insurance and permanent life insurance.
You may have heard about other forms of life insurance such as whole life insurance, universal life insurance or variable life insurance. These are all types of permanent life insurance and each of them will be covered in separate articles.
WHAT ARE THE DEFINING CHARACTERSITICS OF TERM LIFE INSURANCE?
Length of Coverage
As described by State Farm Insurance Company, term life insurance is aptly named as it is characterized by lasting a specified length of the time, or term.
The span of this duration is determined when purchasing the policy. Term life insurance is most commonly purchased in increments of 5 or 10 years (e.g. 5 years, 10 years, 15 years, 20 years, 25 years, 30 years) – you can see an example of this on State Farm’s website.
After this interval has passed, the policy simply expires, no longer holding any value.
As the Guardian Life Insurance Company of America explains, the purpose of a term life insurance policy is to provide a cash payout to the policyholder’s beneficiaries in the event of a policyholder’s untimely death during the life of the policy.
Allstate Insurance Company further describes how this money is called a death benefit and is tax-free.
The death benefit can be used by the beneficiaries to pay for the cost of your funeral as well as cover other expenses that would be difficult to pay for with the loss of your income.
Even though USAA Financial Services Company states that term life insurance is typically the least expensive life insurance option, Best Life Rates estimates that 44% of millennials expect term life insurance to be more expensive it actually is.
The amount you pay for the policy is called a premium. You can choose to pay your premium on either a monthly or yearly basis. Paying on a yearly basis can provide the opportunity for a slightly lower price.
The cost of a term life insurance policy is based upon the following factors:
1. Coverage Amount
The larger the death benefit that would be paid out to your beneficiaries upon your death, the more the term life insurance policy will cost.
Of note, Guardian reveals that the amount of death benefit that you may purchase can be limited according to your income.
2. The Addition of Any Riders
Want a more robust policy? You can add riders to provide certain benefits.
For example, as Guardian explains, if you were to become permanently disabled and unable to work, having the waiver of premium rider added to your term life insurance policy would allow you to avoid paying your term life insurance premiums while still keeping your policy in force.
3. Policy Duration
The Nationwide Mutual Insurance Company explains that the longer you would like your term life insurance policy to last, the more the policy will cost because the greater the likelihood that you will pass away during the life of your policy.
4. Your Health
A life insurance company wants to know how risky selling a life insurance policy to you can be. Evaluating your health is an important step in determining if you may be more likely to pass away during the life of your policy and, if so, how early on that might occur.
As Guardian explains, a life insurance company can ask that you to go through a medical underwriting process. This helps the life insurance company best determine the status of your health prior to offering you the opportunity to purchase a term life insurance policy.
One of the most commonly looked at health factors is history of tobacco use. As Progressive Corporation Insurance Company states that, those who smoke should expect to pay more for a term life insurance policy.
Similarly, Nationwide states that, those who have pre-existing conditions including diabetes can expect to pay more even if the diabetes is well-managed.
5. Your Age
As Haven Life explains, the younger you are, the further you are away from the end of your life and therefore the cheaper the policy will be.
In other words, being younger lessens the likelihood that you may pass away during the life of your term life insurance policy, which would help the life insurance company avoid making a payout to your beneficiaries.
6. Your Gender
Nationwide cites the Center for Disease Control when explaining how men typically don’t live as long as women, which is why men will typically pay a little more than women for a term life insurance policy.
Examples of the difference in price by gender, all other factors held constant, can be seen in a chart advertised on Progressive’s website and a chart advertised on Haven Life’s website.
7. Your Job
The more dangerous a life insurance company determines your job to be, the riskier it will be for a life insurance company to sell a term life insurance policy to you.
Progressive lists the following to be examples of more risky jobs: police officers, firefighters, pilots and construction workers. Thankfully, allied health professionalsusually experience the same level of risk as these jobs often do (of course, there are exceptions).
Do you enjoy hobbies that can put your life in jeopardy? If so, the life insurance company may consider you a riskier investment and charge you more for a term life insurance policy.
While Progressive acknowledges that activities considered to more of more concern can vary for each life insurance company, Guardian considers the following hobbies to be more risky: Skydiving, motorcycle racing, hang gliding, mountain climbing, hunting, and even boating/fishing.
9. Driving History
Guardian explains that if you have a record significant for unsafe driving, a term life insurance policy will likely cost more compared to someone who doesn’t have this history.
One example Progressive gives is a history of a DUI.
10. Any Criminal History
Progressive explains how previous criminal history can potentially prevent you from obtaining a term life insurance policy.
- Your Financial History
Progressive explains that your credit score won’t impact the cost of your term life insurance policy, but a lack of employment history or a history of bankruptcy may.
Unlike a permanent life insurance policy, you can cancel a term life insurance policy at any time without requiring the payment of any fees.
In fact, Transamerica Corporation Insurance Company explains that you can cancel your term life insurance policy simply by stopping your premium payments.
When premium payments are made on time, then the term life insurance policy is in force, but if you decide not to make the premium payments, then the life insurance company policy can be cancelled.
Cash Value Account
While permanent life insurance policies have a cash value account, term life insurance policies do not come with a cash value account.
Therefore, aspects of permanent life insurance such as investment returns and dividends will not apply to policyholders who have term life insurance.
WHAT ARE THE MAJOR SUBTYPES OF TERM LIFE INSURANCE?
The Insurance Information Institute, a United States association dedicated to expanding consumer knowledge of insurance, acknowledges the following as different subtypes of term life insurance:
1. Level Term Life Insurance
While term life insurance is the most common type of life insurance, level term life insurance is the most common subtype of term life insurance.
Also referred to as level premium life insurance, Guardian describes how level term life insurance is characterized by how both the premium and the death benefit stay the same throughout the duration of the policy.
2. Decreasing Term Life Insurance
Decreasing term life insurance still has a premium that remains constant throughout the duration of the policy. However, Guardian explains that the death benefit amount decreases over time.
Because the death benefit diminishes, decreasing term life insurance is typically less expensive than the above level term life insurance policy. Despite this, it is less popular than level term life insurance policy.
3. Renewable Term Life Insurance
Renewable term life insurance assures that the policyholder can extend his or her policy after the date the policy was originally intended to end. Sometimes policies are renewed on a yearly basis. Therefore, this type of policy is also sometimes referred to as an annual or yearly renewable term life insurance policy.
As described by Guardian, the hallmark feature of a renewable term life insurance policy is that the renewal can be done without requiring the policyholder to endure going through the medical underwriting process all over again. This can be quite valuable if you find yourself in a position where changes such as those related to your health might prevent you from being able to purchase a new term life insurance policy once your current policy expires.
When the current renewable term life insurance policy expires, though, your premiums will likely increase to match your increased age.
4. Return of Premium Life Insurance
Term life insurance offers the ability to provide a death benefit should you pass away while the policy is in force. However, once the policy’s term is completed, the policyholder is not left with anything of value.
As AAA Life Insurance Company explains, a return of premium life insurance policy changes this outcome, requiring the life insurance company to return the premium payments that the policyholder made back to the policyholder. This would only be done, though, if the policyholder did not pass away while the policy was in force.
Of course, this type of term life insurance policy typically costs more and requires that you keep the policy in force for its entire duration.
FINAL THOUGHTS. . .
I hope you feel more comfortable with the topic of Term Life insurance now that you have read this article.
There is still more to learn about other types of life insurance, but if you’re ready to purchase a policy, though, be sure to contact an independent insurance agent to get things started.
Do you have any additional information to share on whole life insurance? Any questions on aspects that may not have been covered? Before moving on, please help make the Money Mobilizer a supportive and welcoming community for our current and future colleagues by leaving a question or sharing your knowledge below!