Understanding Term Life Insurance

April 21, 2020

Life Insurance: Understanding Term Insurance

What exactly is "Term" life insurance?  I like to think about Term Life Insurance like car insurance.  You agree to pay the insurance company a premium (monthly, quarterly, semi-annually or annually) for a certain period of time, in exchange, the insurance company agrees to pay out a sum of money to whomever is the beneficary if you pass away...just like the auto insurance company agrees to pay out to a certain claim amount if you get into an accident.

Term life insurance does not have an investment component, it is simply trading dollars to transfer the risk to the insurance company, no cash is accumulated in the policy.  And, as long as you pay the premium for the period of time that the policy designates, you'll have coverage that will provide a death benefit.

Here are a few key bullets:

  • Term is the best "bang for your buck", you get more coverage with fewer premium dollars than with a permanent policy.
  • You are purchasing coverage for a specific period of time.
  • Premiums get more expensive as we age or develop health concerns.
  • Tobacco users pay sigificantly higher premiums.
  • Life insurance companies base your rate on factors that impact your mortality, such as age, health, tobacco use, family history, etc.
  • Not all life insurance companies have the same standards, you should check with a Financial Advisor to find a company that fits your needs and situation.

Types of Term Life

  • Level term/level premium - the death benefit is the same on day one as it is on the last day of the policy; the premium cost is the same the first month as it is the last, regardless of the fact that you are older or may have new health situations that did not exist as of when the policy was written.
  • Annually renewable term - each year, you can renew the policy without having to provide that you are insurable, premiums increase with age.
  • Decreasing term - the death benefit decreases over time, but the insured continues to pay the same premium month over month, these are often used to cover a mortgage.
  • Convertible term - usually this is a rider on a policy (additional bell/whistle), but you can change the type of policy before the term expires without proving that you are insurable; premiums are based on your age when converted - but at your initial underwriting class.
Insurance products offered through insurance companies with which Waddell & Reed has sales arrangements. This is meant for educational purposes only and should not be considered investment advice. Please consult with a financial professional regarding your personal situation prior to making any financial related decisions. (04/20)