Understanding Term Life Insurance

Understanding Term Life Insurance

As you reach many of life's major milestones, you may find yourself paying more attention to the question of life insurance. While it might not always be an easy topic to discuss, its benefits could help your family pay off expenses — and help give them peace of mind — when you're gone. This makes purchasing a life insurance policy an important consideration in helping protect your family and loved ones.

Among the various types of life insurance, term life insurance is traditionally viewed as one of the most economical options. Here, we've covered the basics of term life insurance to help you decide if this is the right policy for you.

What Is Term Life Insurance?

Term life insurance pays a benefit if you pass away during the insurance coverage period. This period, or policy term, generally lasts 10, 15, 20 or 30 years. The premium must be paid in a timely manner for the policy to stay active.

There are two basic categories of term life insurance: guaranteed level and renewable/convertible. (These categories are not mutually exclusive.) A guaranteed level term policy is a popular choice because the premium stays the same for the entire policy length. With no price increases during this term, it offers an economical way to purchase life insurance. When the term is over, coverage ends.

A renewable/convertible life insurance policy can be either short-term or extended. As its name suggests, a renewable policy can be periodically renewed — with no additional underwriting required — though the premium gradually increases over time. This is a great option for those who may want temporary coverage. "Convertible," on the other hand, means you can typically convert your term policy into a whole life insurance policy without any additional underwriting or undergoing another medical exam.

When Could It Be a Good Fit?

Some people feel it's important to buy insurance when they get their first job, while others wait until they have a family to support. Whatever your motivation for purchasing life insurance, there are reasons it's smart to get insured early.

An insurance policy helps protect your loved ones financially. If you have student loan debt, credit card debt, a mortgage — or any other financial obligations — term insurance can allow your loved ones to pay off debt without worrying about the financial implications if you pass away.

This is especially important for those who have co-signed loan documents with you and would need to take over payments after your death. As you continue to move forward in your career, your income will rise — but your premium will remain the same if you've chosen a guaranteed policy.

How Is Term Life Insurance Used?

Once you understand the basics of term life insurance, it can be helpful to see how this policy type can be used in the real world. Here are examples of how individuals can take advantage of term life insurance:

  • Sarah is a 22-year-old college grad starting her first job. While her company offers life insurance, her coverage ends if she changes jobs. She has student loans to pay off and wants to make sure that her parents — who co-signed on her loans — won't have to dip into their retirement savings if something happens to her. She decides to buy a 10-year term policy to cover her student loans.
  • Nicolette and Brad are newlyweds, both in their early 30s. They have taken out loans on two cars, just purchased a house and plan to start a family soon. They have each purchased a 30-year term policy to ensure that their spouse — and future children — are protected in case one of them passes away unexpectedly.

Regardless of what life stage you're in, life insurance is something worth considering as you prepare for the future. Think about your needs and decide on a policy that fits your goals. Term life insurance can be an economical option that can provide value and help protect those you care about the most.

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