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If you’ve been shopping for life insurance you’ve probably come across options that fall into either “term life” or “whole life” and may be wondering the difference between the two.
Term life is typically cheaper than whole life insurance, which makes it very appealing.
This guide is going to cover the basic things that you need to know about term life insurance so you can decide if it is the best life insurance type for you.
What is term life insurance?
As the name hints, term life insurance is a policy that covers you for a specific term of your life.
For example, you can purchase term life insurance for anywhere between 10 to 30 years and some policies also have a maximum age limit of 80.
The premiums are lower than whole life insurance but don’t build a cash value.
You can get term life insurance quotes to see if it would be a good option.
Term life insurance requirements
While many view term life insurance as one of the simpler life insurance options you still have to go through an application process.
The application process is what determines the monthly price you’ll pay and some insurers will also require that you undergo a medical exam to evaluate the current state of your health.
Other than the application process and medical exam there are not many other term life insurance requirements.
What are the pros and cons of term life insurance?
Deciding which life insurance is best for your situation can be tricky so here’s a list of the pros and cons of term life insurance.
Pros of term life insurance
- More affordable than whole life insurance
- Tax-free death benefits
- Flexible policy options
- No cancellation penalties
Cons of term life insurance
- It may not cover your entire lifespan
- No cash value
- Has an age limit on who can apply
- May require a medical exam
What is the cash value of term life insurance?
Some life insurances such as whole life insurance, have a built-in cash value in addition to paying out a death benefit to your beneficiaries.
Term life insurance doesn’t come with a built-in cash value so you cannot take a loan out against your life insurance policy if an emergency arises.
Additionally, when the term comes to an end you won’t get any money back, but some insurers may have the option for you to convert it into a whole life insurance policy.
How much should you pay for term life insurance?
When you decide to get term life insurance quotes and go through the application process the information that you enter is going to determine how much your rate is going to be in addition to the amount of life insurance that you need.
To determine how much life insurance you need you’re going to want to factor in expenses outside of funeral/burial costs too. For example, do you have a mortgage, small kids that will need help paying for college in the future, or other debts that will need to be handled when you pass away?
Plus, don’t forget about factoring in the fact that dying is expensive. Each year the cost to plan a funeral, or even do a cremation increases.
Your loved ones will already be grieving your death, the last thing you want them to have to worry about is how they are going to handle your end-of-life wishes and any outstanding debts that you have.
Life insurance is peace of mind for you and the loved ones that you leave behind.
What can you do with a term life policy?
Term life insurance doesn’t build cash value so when you’re alive there is nothing that you can do with your term life policy.
However, once you pass away the death benefit will be paid to your beneficiary and they will be able to cover your end-of-life expenses, and debts, and even use the money for everyday expenses such as groceries if they choose.
Term life insurance provides temporary financial protection of no more than 30 years for a more affordable rate than whole life insurance. Understandably, due to its affordability, it doesn’t come with all of the perks of whole life insurance but can be a great option for young adults, stay-at-home parents, and even single parents.
Ideally, you’d want to go with a plan that allows you to convert it into a whole life insurance policy at the end of the term.
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