Depending on your current situation, life insurance may feel vital or irrelevant. On one hand, you may not need it for another fifty years. But if you or one of your loved ones is involved in a fatal crash, it suddenly becomes one of the most important things in the world.
But which type of life insurance is right for you? One of the most popular and affordable options is term life insurance. We’re going to it break down: What it is, how it works, how it compares to whole life insurance and who is most likely to need it.
💡 Summary at a Glance
Term life insurance offers affordable, straightforward protection for a specific period of time, paying a lump sum to your loved ones if you pass away during the term.
It provides coverage for a set number of years (e.g. 10, 20, 30 years or up to age 85) with fixed premiums.
The payout can help cover funeral costs, debts, mortgages, living expenses and income replacement, while also providing a safety net for your family.
Term life insurance is generally more affordable than whole life insurance but does not build cash value and expires at the end of the term.
It’s especially suitable for young adults, people on a tight budget, parents with dependents, and those with mortgages or major loans.
If your goal is pure protection at the lowest cost, term life insurance may be the right choice.
What is Term Life Insurance?
Term life insurance provides short-term coverage for a specific period of time, known as a term. You can choose to get coverage for 10, 20, or 30 years. Or the coverage can last up to age 85.
If you pass away during the term, your beneficiaries – usually your spouse/ partner, children, parents or other loved ones – receive a lump sum or death benefit. This money can be a life raft — it can cover final expenses, pay bills, create a safety net and replace your lost income. It can also ease the burden on your loved ones during the most difficult time.
However, if you outlive the term, the insurance policy simply ends.
How Does Term Life Insurance Work?
One of the benefits of term life insurance is it’s easy to understand.
- You choose the coverage amount (for example, $500,000). An agent can help you determine how much coverage you need by using the DIME method. Together you’ll consider your Debt, Income, Mortgage and Education to estimate the ideal value of your life insurance.
- You choose the length of the insurance term (for example, 30 years).
- You pay a fixed premium for the duration of the term. This means you won’t have to worry about the cost of your life insurance changing.
How Does Term Life Insurance Compare to Whole Life Insurance?
Cost
The big selling point for term life insurance is its affordability; it offers you the option to get good coverage at a lower cost.
Premiums
Ideally, the premiums of both term and whole life insurance will be fixed for the duration of the policy. Beware of premiums that are ‘affordable’ but ‘flexible’ — these have the potential to increase in the future.
Coverage
Term life insurance expires when the term is over, while whole life insurance – as the name suggests – is lifelong.
Cash Value
Term life insurance has no cash value. Meanwhile, the cash value of whole life insurance grows over time; this means that if you pass away, your loved ones can receive the death benefit and the cash value of the insurance policy. Additionally, if you are going through a rough financial period you can access the cash value of whole life insurance in the form of a loan.
Other Uses
Since whole life insurance has a cash value, it can be used as collateral for a loan or even a mortgage. Term life insurance can be used to help secure a mortgage – once the term of the insurance is equal to or longer than the mortgage period – but since it has no cash value it can’t be used as collateral for a loan.
Who Should Consider Term Life Insurance?
- Young adults (20s or early 30s) — As an added bonus, premiums for young, healthy people are usually very low. Studies show that most young people seriously overestimate the cost of life insurance. Get a quote and you may be surprised!
- People on a tight budget — You may think that a tight budget means you can’t afford insurance. Actually, a tight budget means that any loss of life will be financially devastating. You should do your best to prevent a scenario where your loved ones have to go into high-interest debt to pay for your funeral or to replace your salary.
- Those with young children or dependents — Let’s imagine your child is two years old. It may be unthinkable that they’ll experience a future without you, but part of your job as a parent is to prepare for painful possibilities. You may choose to get insurance for 20 years so that if anything happens to you in this time, your child will be protected.
- People with a mortgage or significant loan – Let’s say you have a 30-year mortgage. You can choose to get life insurance for the same period so that if you pass away, your debt is paid off. Also, most lenders won’t approve a mortgage unless you have some form of life insurance.
💭 Final Thoughts: Is Term Life Insurance Right For Me?
Ultimately, term life insurance is right for you if your goal is to protect your loved ones, to get the most affordable coverage, or to get mortgage approval. If you want your insurance to double as an investment or to last for the rest of your life, consider whole life insurance instead.
But… what if you want whole life insurance but can’t afford it now?
There’s no need to feel boxed in; talk to an agent about your options. They can help devise a strategy to convert your policy or to purchase whole life insurance when the term expires. Remember that you want a life insurance partner who cares about your unique situation and will help to tailor a solution that best serves your needs.
About Us
Our Maritime team of agents is here to help you. Whether you need advice on insurance or financial planning, we’re committed to offering personalised support and solutions. If you’d like to chat, you can always reach out to us.
