How Does Term Life Insurance Work
Broadly speaking, there are two main types of life insurance policies. They are permanent life insurance policies and term life insurance policies. In this article we’ll look at term policies. And specifically at the question “how does term life insurance work?”
Long Term vs Short Term Commitment
If you want a lifetime commitment to investing in a life insurance policy, then a permanent life insurance policy might be the best choice. The policy will stay with you as long as you live (as long as you keep paying the premiums!). It guarantees a death benefit for your loved ones when you pass.
However, if you want a shorter-term commitment of paying premiums for a life insurance policy, there’s another option. It’s term life.
One option is not better than the other. Both types of life insurance policies have their own pros and cons. Which one is best for you depends on your personal situation. To better understand which life insurance type may be best for you, check out this article.
For now, in this article, our focus is on how term life insurance policies work.
What Is a Term Life Insurance Policy?
But first what is a term life insurance policy? A term life insurance policy is a type of life insurance policy that requires you to pay premiums for a set period of time. Common time periods are 10, 20 and 30 year policies.
How Does Term Life Insurance Work?
If you pass away within the term of your policy, your dependents will receive the policy’s death benefit. So, for example, if you get a 10 year policy and you pass within those 10 years, your beneficiaries will receive a death benefit. If you live longer than 10 years, they will not.
Compared to a permanent life insurance policy, a term life insurance policy is usually less expensive. However, unlike their permanent counterpart, term life insurance policies do not have cash value, payout after the term expires, or any other value aside from the death benefit.
Applying For a Term Life Policy
When you apply for a term life insurance policy, you will need to choose what type of is the best for you. Your main choices will be how long you want the policy for and how large your death benefit should be.
You will have to fill out an application form that includes personal information such as age, gender, and health history. This is often done online these days, but can be done in person or using paper/mail as well. Even if you do it online, you will almost always need to have a medical exam which does need to be in person.
Once you finish your application and submit it, it will go underwriting. Underwriting is the process in which the life insurance company will assess your risk.
It determines if you will be approved and, if so, how much you will pay for coverage. Usually, the younger and healthier you are, the lower your rates will be.
Factors That Affect The Cost of a Policy
There are many things that may impact the costs of your term life insurance policy such as:
- Age
- Gender
- Current health
- Medical history
- Family history
- Tobacco status
Once the term is over (ie. 10 years, 20 years), then your policy is no longer valid. This means your dependent/s cannot claim a death benefit if you outlive the policy’s term.
However, some policies allow you to renew which will allow you to continue coverage on a year-by-year basis once your initial term life insurance policy ends.
Exclusions For Payouts
There are some situations where a policy will not pay your beneficiaries, even if you pass within the policy’s term. Exclusions include:
- Death by suicide
- Death as a result of participating in a dangerous activity
- Death while doing an illegal activity
- Death as a result of an act of war
- Death while living outside of the United States
It’s important to read the fine print of your policy so you understand the exclusions it contains.
