What is term life insurance?
There are two types of life insurance policies: term and permanent.
The difference can be compared to the difference between renting an apartment and buying a house.
With a term policy, you’re essentially renting your coverage for the duration of your policy. On the other hand, a permanent life policy is an asset you own.
Term life insurance is a contract that guarantees coverage for a set amount of years. Unless it’s renewed, you will lose your coverage. It provides just as much protection as a permanent policy, but it’s the cheaper option of the two.
These are the terms available: Term 10 (contract for 10 years); Term 15 (contract for 15 years); Term 20 (contract for 20 years); Term 30 (contract for 30 years); Term to 65 (contract for 65 years); Term to 70 (contract for 70 years); Term to 75 (contract for 75 years), and Term to 100 (contract for 100 years).
There are also more investing benefits with a permanent life policy and it has a cash value that you can draw down on before you die. It’s also more costly than term insurance.
Another big distinction between ‘term and perm’ is that premiums for permanent policies are always level, meaning the cost never changes.
With term insurance, you pay less when you’re young and more as you age.
When a Term 10 policy expires, your contract is automatically renewed for another 10 years, but at a higher rate. The same logic applies for Term 20 and Term 30 policies. (With Term 65 contracts and everything beyond, there's no option to renew.)
Why the higher rate? It’s simple. You’ve aged and are therefore at a higher risk of developing serious medical issues. The more risk you present, the more you pay.
If you die while your policy was still active, your beneficiaries will receive a tax-free, lump sum payment called a death benefit. Since you get to choose how big you want your death benefit to be, if you find you’re struggling to pay your monthly premium, you can opt to lower its dollar value. This can reduce your monthly bill.