Life insurance is just one of those things that become more important as you age. When you marry, start a family, or buy a house, you begin to realize that your grown-up life comes with a variety of financial responsibilities and obligations.
Nobody wants to imagine a worst-case scenario. But at the same time, you need to help financially secure your spouse and kids if that worst-case scenario occurs, and you're not around anymore to help them. They certainly should not have to tap into their retirement fund or college savings.
If you're looking into your options or perhaps already comparing term life insurance quotes, you'll definitely need to know just how term life insurance works.
Let's get to it...
What Is Term Life Insurance?
Generally speaking, life insurance covers your family's financial burden should an unexpected situation occur. In exchange for monthly premiums, you can ensure that your dependents live comfortably should you pass away. The insurance can cover anything from funeral costs to outstanding debt and even your children's college education.
Term life insurance is different in that it allows you to set a particular period during which the policy will be valid. Common terms tend to be 10, 20, or 30 years. If you pass away before the end of the specified term, the person(s) you listed as beneficiary will receive the financial payout pre-determined in the initial contract.
For instance, you might sign a 20-year, $500,000 term life insurance policy. As long as you are paying regular premiums for these 20 years, your family will receive $500,000 if you pass away during that term. If, however, you still live at the end of the term, the benefit will disappear along with your premiums.
To prevent that scenario, take a look at the different types of term life insurance. Term life insurance can either be renewable or convertible.
Let's walk through the differences:
- Convertible life insurance allows you to transfer your policy to a whole life insurance of equal value, without necessarily having to show that you're in good health as you would when signing a new policy. The period during which you can convert your policy is typically shorter than the entire term of your insurance.
- Renewable life insurance allows you to either renew or extend your policy at the end of the term. As a result, you can ensure continued financial benefits for your family even after the term to which you initially agreed to pass.
Understanding the Difference Between Whole and Term Life Insurance
The main difference between whole and term life insurance is in its name.
Whole Life Insurance
Whole life insurance is permanent, meaning that your death benefit is guaranteed regardless of when you pass as long as your premiums are paid. A term-based policy, as mentioned above, is limited to the time frame to which you agreed when signing the paperwork.
As a result of this primary difference, premiums for whole life insurance tend to be higher than a term-based alternative. At the same time, permanent life insurance builds up cash value with each payment you make, allowing you to borrow against it should an immediate need arise for you or your family. Over the years, this savings component grows with the money you have invested in your life insurance.
Term Life Insurance
Term life insurance, on the other hand, works best for a more time sensitive or particular need. If you are looking to cover a specific period of risk, such as your children's time in college or the years before your retirement, the more affordable premiums make this type of policy your best choice.
How to Choose the Right Term Life Insurance
The two fundamental types of term life insurance, renewable and convertible, bring with them a basic choice:
What type of term life insurance is best for you?
Renewable policies tend to be cheaper than convertible alternatives. Your premium may rise after renewing your policy for another term, but not to the same level as converting your life insurance to permanent would.
You might buy a $100,000 life insurance policy as a healthy 25-year old in exchange for premiums of $120 per year. When you turn 35, you can choose to renew that same policy regardless of whether you have experienced medical issues in the past decade, even though your rates may rise.
Convertible policies, on the other hand, are ideal if you are looking for whole life insurance down the road, but cannot afford the premiums associated with this type of policy quite yet. You might be afraid that by the time you're ready to switch to a permanent insurance, your health will not be in the right shape to make a switch to permanent life insurance realistic.
In that case, a convertible term life insurance means that when your term is finished, you can exchange your policy for whole life insurance of equal value. This exchange typically does not require either underwriting or a medical exam, meaning that you can easily convert a $50,000 term life insurance policy to a $50,000 whole life policy.
Keep in mind, though that your new premiums will be higher, and will be based on your age, health, and other factors at the time you convert.
Finding the Right Coverage for Your Needs
When growing up, you probably don't think much about life insurance. But as you begin to experience major shifts in your life, your financial responsibilities increase. From buying a home to getting married and having children, you need to secure not just your own but your family's financial future.
Fortunately, term life insurance can help you accomplish just that, without a significant financial investment that a more permanent alternative brings with it. In many cases, it's your first step toward protecting your family's finances should you pass away.
No matter which type of life insurance you choose, start the process by getting quotes from several providers. That quote process helps you better understand the financial commitment, which can range widely based on whether you choose whole or term, renewable or convertible policies.
After getting a range of quotes, you can decide which option fits best for both your personal situation and your budget. Contact us to get started, and start sleeping a little better knowing that your family will be in good financial hands should the unexpected happen.
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