Term Life Insurance: What to Know
When it comes to financial planning, one of the most important aspects to consider is life insurance. It provides a sense of security for your loved ones and can alleviate financial burdens in the event of an unexpected tragedy. This makes it important to have a backup plan if such a crisis strikes.
What is Term Life Insurance?
Term life insurance is a type of insurance that provides monetary compensation to the beneficiaries of a policyholder who passes within the predetermined term of the policy. This compensation is given as a lump sum payment, which can help your loved ones cover funeral expenses, repay debts, and support them in the absence of your income. Term life insurance only lasts for a specific period ranging from 10 to 30 years, depending on the policy chosen. The most common terms for term life policies are 10, 15, 20, and 30 years, and the premiums for these policies remain the same throughout the term of the policy.
What is The Difference Between Permanent and Term Life Insurance?
Term life insurance differs from permanent life insurance in various ways. While term life insurance is temporary and lasts for a specific duration, permanent life insurance provides coverage throughout the policyholder's lifetime. Permanent life insurance premiums are typically higher than term life insurance premiums as they include an investment component, which accumulates cash value over time. The cash value of permanent life insurance can be withdrawn or borrowed against during the policyholder's lifetime, unlike term life insurance, which only offers a death benefit.
What Happens If I Outlive My Term Life Policy?
One of the most significant drawbacks of term life insurance is that the policyholder receives no payout if they outlive the policy's predetermined term. However, some insurance providers offer the option to renew the policy after its term expires. The renewal process is dependent on the policyholder's health condition and age. The premiums for renewed policies may be higher than the original term policy and could increase significantly as the policyholder ages.
Can I Convert My Term Policy to Permanent Coverage?
Yes, you can convert a term policy to permanent coverage. Most insurance providers offer what is known as a term conversion "rider", meaning policyholders can convert their term policy to permanent insurance without the need for a medical examination. Conversion riders allow policyholders to retain their insurance coverage, but at a higher premium. Paying the increased premium for permanent coverage also means accumulating cash value in the policy over time, making it worth considering for those looking for long-term protection.
Are There Any Tax Benefits with A Term Life Policy?
Unlike permanent life insurance that has tax benefits, term life insurance does not have tax incentives. Even so, term life insurance remains a viable solution for those seeking affordable life insurance policies that can provide temporary coverage in the event of the unexpected. When it comes to being taxed, the proceeds received from term life insurance policies are generally tax-free. The income received from the money invested through permanent life insurance policies generally incurs tax liabilities.
