Without a doubt, Term Life Insurance is one of the most popular life insurance products in America today. The ability to purchase a lot of life insurance at an affordable price drives consumers to agents now more than ever. But, with any type of insurance, we need to discuss term life insurance pros and cons.
Since term insurance is temporary and the policyholder is only paying for the cost of the life insurance (no premium diverted to a cash value account) a huge term policy can be obtained for very little money, especially if the consumer is young and healthy.
When you compare the rates for $1 million in coverage between term insurance and whole life or universal life insurance, the difference in premiums is staggering.
Why Term Insurance is Inexpensive Compared to Others
Term insurance has a history of being the least expensive life insurance on the market today. There are several things that contribute to term life’s low premiums:
- Temporary – Not Permanent – Since term insurance is sold in blocks of time (5, 10, 20, or 30 years) it is considered temporary life insurance. This is true even though most insurers will offer a renewal for one or five years at the end of the term. When you purchase term insurance, you are betting that if you die, the event will likely happen during the term of the insurance policy. If you do, your beneficiary gets paid. If you don’t, they won’t.
- Low Mortality Rates – Since most policyholders outlive their term insurance policy period, the insurers pay far fewer claims than they do with permanent insurance. With term life insurance, many of the policies issued end up as 100% or more in profit.
- Short Life Span – Most term life insurance policies have short life spans because the policyholder will either convert the policy to permanent insurance, or they will simply cancel the policy and buy something that is permanent and has an investment component. This is fine with the insurer because they are earning investment income on the premiums you pay whether your policy lives to the expiration date or not.
Term Life Insurance Pros
All insurance products have pros and cons depending on the consumer’s purpose for the coverage. With life insurance, the need always determines the product.
- Large Face Amounts – Since term insurance is so affordable, consumers can purchase very large face amounts (typically $1million or more) to provide the money for their surviving loved ones to stay above water after the death of the primary breadwinner.
- Affordability – As stated previously, term life insurance is the most affordable insurance on the market, especially for younger and healthier individuals. It’s almost incredible how much insurance you can by for the cost of an inexpensive meal.
- Options – Depending on the insurance company you select, there are several optional coverages (riders) that can be purchased to broaden the coverage in your policy and provide living benefits for the policyholder.
- Convertibility – Nowadays, most insurance companies will allow the policyholder to convert their term insurance to a permanent insurance product during or at the end of the policy period. Typically, the insurer will allow the policyholder to convert a portion or the entire amount of the death benefit; and the best part is, you do not have to prove you even insurable. They will not take your health into consideration, only your age at the time of the conversion.
Term Life Insurance Cons
Like any insurance product, term life insurance has some disadvantages that consumers need to be aware. This doesn’t mean that there’s something wrong with the product, just that in some circumstances, term insurance is not the best solution.
- Temporary Coverage – Term life insurance is not considered permanent coverage. The policyholder cannot just “set it and forget it.” If you are looking for insurance coverage to last a lifetime like final expense insurance, term insurance is not a solution.
- No Living Benefits – Term life insurance provides a death benefit only. There are no living benefits unless you purchase riders that will add them to the policy.
- No Cash Value – Term insurance does not build cash value over the life of the policy like whole life or universal life insurance does. With term insurance, the policyholder is paying only to cost of insurance and administrative fees; nothing more and nothing less. When your term insurance policy expires and you choose not to renew it, that’s it, you get nothing back from the insurance company.
- No Flexibility – Term life insurance has no flexibility. Once the policy is issued, the policyholder cannot change it except for converting it. The face amount cannot be increased or decreased and the periodic premium cannot be changed for any reason (unless you purchase an un-level policy where the premiums increase as you age).
The most important thing that you can get out of this article is to understand that the term insurance marketplace is very competitive. That is why buying term insurance online through an independent agent who represents all of the top competing insurance carriers makes such good sense. Instead of you having to call multiple companies and agents to find the best insurance rate, you can contact one independent agent who can find the best rate for your budget and circumstances.