Term Life Insurance: Benefits, Uses, and Key Considerations

Faced with life’s uncertainties, ensuring that our loved ones have a financial safety net is vitally important. Term life insurance is a straightforward yet effective tool in the insurance industry that can be used for financial protection. However, if you are new to the life insurance market, you may be searching for information on this product. This article will discuss the function of term life insurance, its applications and key considerations to help you make informed decisions in safeguarding your family’s future.

What is a Term Life Insurance Policy?

A term life insurance policy provides life insurance protection for a specified period (or term). The term of these policies varies across insurers and can be as few as five years (T5), to as many as your remaining lifetime (Term-to-100 or T100).

If the insured life dies during the term of the policy, a tax-free death benefit is paid to the named beneficiaries on the policy. Term life insurance policies have a fixed (level) death benefit throughout the term of the coverage.

Premiums for term life insurance are fixed (level) and are paid either monthly or annually. These premiums are paid throughout the full coverage period.

Contrary to other insurance products such as participating whole life and universal life insurance, there is no cash value for term life insurance policies (i.e., if the term life insurance policy is cancelled (terminated) then no funds are paid to the policy owner).

How Can Term Life Insurance Be Used?

There are a wide range of reasons for someone to buy a term life insurance policy and a few examples will be discussed below. Note that these are simple, non-exhaustive examples. It is recommended that you discuss your situation and objectives with a licensed insurance advisor to determine the most appropriate coverage for your unique needs and circumstances.

T10 Level Term Life Insurance

The hypothetical owner of this insurance policy buys this policy to cover his or her eight-year-old child’s university fund. In the event of the parent’s untimely death, the child will be able to fund his or her education costs.

T20 Term Life Insurance

The hypothetical owner of this insurance policy buys this policy to satisfy a shareholder agreement with his business partners. The 20-year term coincides with the 45-year-old’s retirement plans and is intended to be used to provide the funds to repurchase the deceased’s shares in the event of a premature death.

T100 Life Insurance

The hypothetical owner of this insurance policy is a successful business owner. The plan for her business is to pass it on to her children once she passes. The T100 policy provides permanent coverage to cover the large capital gains tax bill that will be payable at her death.

Factors to Consider Before Purchasing Term Life Insurance

There are several important factors to consider when shopping for a term life insurance policy:

1. Coverage Amount: depends on the objectives for the insurance (e.g. cover mortgage, cover debts, pay estate taxes, provide replacement of lost income, fund a buy-sell agreement, etc.).
2. Insurance Company: it is generally recommended that you compare policies across reputable insurers to find the best product for your circumstances.
3. Policy Features: additional features may be available and appropriate for your circumstances such as convertibility to a permanent insurance policy with no additional medical requirements, guaranteed renewal at guaranteed premiums at the end of the term, waiver of premium on disability, coverage for children, etc.
4. Premiums: premiums are generally lower for than other life insurance products for an insured life. To ensure coverage is in force throughout the term of the policy, defining a budget and finding a policy that fits into it is essential.
5. Professional Advice: if you are unsure about any aspect of term life insurance, consult with an insurance advisor to guide you through the process.
6. Term Length: the length of coverage should align with the insurance need (e.g. mortgage term length, years before child goes to college, when you expect to retire, etc.).
7. Underwriting: insurance companies will assess your health history, lifestyle and occupation to determine your premium rate and coverage eligibility. Be prepared to answer questions and possibly go through a medical examination.

Conclusion

Term life insurance can be used for many purposes while being relatively affordable for the prospective insurance shopper. If you are interested in learning about how you can use term life insurance to meet your goals, schedule a call with our team!