For many people, permanent life insurance—which includes whole and universal life policies, among others—is a good financial fit. Very often, however, a less expensive option—term life insurance—works even better. As the name implies, this type of policy provides coverage for a specific term, usually a level-premium period of 10 to 30 years (which is then often renewable to age 80 or beyond). That limitation means you pay less in premiums, though the cost advantage generally decreases as you get older.
Unlike permanent or “cash value” life insurance, which lets you build up cash value in your policy, term insurance provides only a death benefit and is often referred to as “pure” insurance. A big advantage of term insurance is its simplicity. Permanent life policies come in myriad forms, and may put the investment portion of your premium into fixed or variable investments. Fees vary widely depending on the type of policy and the riders and options you choose. Though often touted for the ability to promote saving through required premium payments, whole life and other permanent policies may be inferior to other retirement savings vehicles such as employer-sponsored plans or IRAs. In contrast, term policies are easy to understand—you make a specified payment in return for a promised death benefit.
Term insurance often appeals to those who are in the prime of their careers but who have multiple financial commitments, for mortgage payments, retirement and education savings, and other obligations. Term insurance lets such policyholders cheaply guarantee financial security for their families in the case of an untimely death.
The face amount of a term policy—its death benefit—remains the same throughout whatever number of years the policy is in force. For most level-premium policies, the insurer can’t adjust that amount, the length of the term, or the amount of the premiums. When the term expires, however, your insurance coverage ends. Many term policies guarantee you the chance to renew the insurance for an additional term, but the new premiums will be higher, reflecting your shorter life expectancy.
The cost of a particular term policy depends on your age, your health, and other factors. Typically, when you apply for a policy, you’ll have to answer detailed questions about your medical history and risk factors—policies for smokers usually cost more, for example—and you’ll have to pass a medical examination. (Some term insurance policies, approved in most states, enable you to obtain coverage without taking a physical.)
To find a term policy, you can shop online or you can work through an insurance agent. Choose a highly rated insurance company that will be around if and when your heirs need to collect on your policy.
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