If you are looking for ways to keep your family’s finances safe, you have probably thought about purchasing life insurance. This can be one of the most effective tools for protecting your family against financial disaster if you pass away. With the wide variety of life insurance products available, though, choosing a policy can be a confusing endeavor.
Many agents and brokers will tell you that purchasing a whole life policy is the best option because it can provide your loved ones with an inheritance even if you live past age 100. Although this might be an attractive option in some cases, you might also consider a term life insurance policy. A term policy offers several advantages over whole life and other types of permanent life insurance policies:
- Term insurance is less expensive than permanent insurance. Because term coverage only applies for a certain number of years, the insurance carrier might or might not have to pay the death benefit. Because insurance carriers make more money on policies on which no benefits are paid, they can offer coverage for lower premiums than permanent policies.
Obtaining the term coverage you need at a lower price leaves more room in your budget for bills and living expenses. It also leaves more room for retirement savings and investments, which can provide additional financial protection for your family.
- It can be easier to qualify for a term life policy than a comparable whole life insurance policy if you have had past health problems or you currently take medication for a medical condition. The term insurance market offers several products specifically designed for consumers with less than perfect health. Even if you take medication for high blood pressure or a similar condition, you might be able to qualify for a non-standard term life policy to provide your family with financial security.
In some cases, you can even qualify if you have a serious health condition. Some term policies, referred to as guaranteed issue policies, accept all applicants regardless of their health. Of course, guaranteed issue life insurance carries more restrictions, costs more than standard term policies, and typically comes with low benefit limits; however, this can be an acceptable term life option if you cannot obtain a policy through other means.
- You typically have the flexibility to convert a term policy into a whole life policy down the road. This allows you to adjust your life insurance strategy as necessary to accommodate changing circumstances. If you decide that you want to build cash value and provide your loved ones with an inheritance when your term policy is near expiration, you can opt for the whole life conversion and keep your coverage in force.
Of course, although term life offers several advantages, there are also disadvantages as well:
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Unless you convert your term policy to a whole life policy, your coverage only lasts for a certain number of years. Most term life policies are designed to cover policyholders for 10, 20, or 30 years. If you outlive the policy, you will have to purchase a replacement policy at the end of the term to continue protecting your family.
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If you purchase a replacement policy or convert your term coverage to a whole life policy, your new rates will be based on your age at the time of conversion or replacement. As you might expect, rates for term life insurance increase as you age. For this reason, your premiums will be significantly higher than they were when you originally purchased your term policy. Also, your new rates will reflect any medical conditions you may have developed since the initiation of your original term life insurance policy.
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There is no cash value accumulation within a term insurance policy. "Cash value" refers to the amount within a policy that a policyholder can borrow against, withdraw, receive as a benefit, or use to pay future premiums. Simply put, term insurance is "use it or lose it" coverage. If you die within the policy term, your beneficiary will receive the stated death benefit. If you do not, you will not receive any benefit or refund of premiums.
Because a term policy both offers advantages and carries disadvantages, you should talk to a licensed insurance agent or broker before purchasing coverage. Your broker or agent can help you decide if term insurance is the right kind of policy for you.
