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Term Life Policies

Updated: Oct 29, 2022

The Benefits of a Term Life Policy

"A life insurance policy is a way to guarantee that your loved ones will not be left out in the cold if you die or become ill and cannot work. Yes, you read that last sentence correctly." - Allen Blacklidge

Life insurance policies are available that pay when a person contracts a chronic, critical, or terminal illness. Life insurance is not just for the dying anymore. It is also for the living, which will be detailed later in this article.

What If You Have a Large Bank Account Though?

What if a person has a lot of money in the bank and their family doesn’t necessarily rely on the income they produce from their job? Is life insurance still important? The answer is, yes. Oftentimes the money a person has saved will diminish much quicker than it had been acquired. Also, life-changing events are very expensive. Furthermore, people are living longer now, and outliving their money is always a concern. It is smarter to pay a small premium over time that will cover the huge expenses associated with dying or illness than paying it all at once.

How do I know what policy I need?

The economical aspect of life insurance sparks our discussion on term life insurance. Term insurance comes with lower premiums than permanent insurance. A person can most likely qualify for a large death benefit. Most people who are under the age of 40 and in relatively good health can qualify for a $250,00 to $500,00 term policy for less than $100/month.

It’s very advantageous to take out a term policy when a person buys a home or gets married and starts a family. The most important thing to know about a term policy is that the death benefit or some portion of it (in the case of illness) is available for a period of years specified when the policy is first purchased. The policies are usually 10-years, 20 years, or 30-years. Some companies offer 15-year and/or 25-year term policies and oftentimes group term policies purchased through an employer don’t have a specified number of years but are renewed yearly (as long as the premiums are paid).

Another thing to know about term insurance is that with many companies the policy doesn’t automatically cancel when the term ends, but the premiums will increase based on the current age of the insured. Usually, for a term of 20 to 30 years the rates will go up so dramatically after the term ends that the policies are just cancelled and thrown in the trash. However, there are a lot of carriers that offer what is called a “conversion.”

This option allows someone with a term policy to extend his or her life policy so the death benefit will be available until death or when that person reaches anywhere from age 100 to age 120 (depending on the carrier’s specs) and the policy will just pay out the full benefit. One of the main benefits of a conversion to a permanent policy is that it can be strategically done so that no evidence of insurability required. Term policies often have a “conversion window” in which the permanent policy will be priced in the same risk class that your term contract was. Thus, if a person’s health gets worse or they expect it to worsen, conversion would be optimal during the window.

However, some companies allow conversion outside the window, but there is a chance for the risk class to be higher and the premiums to be much higher for the insured. Also, keep in mind that the entire death benefit may not need to be converted. Thus, if a person has taken out a term-policy to cover a mortgage or the kids’ college tuition and a large chunk of those bills have already been paid, then it may be smart to keep paying the lower premiums of a term policy on a lesser amount of coverage ($250,000 of a $300,00 policy) and convert enough to cover funeral expenses and lifetime needs to a permanent policy.

Because term policies do not have cash value, they will cancel if the premiums are not paid. Some policies have riders (additional coverage) available for a small fee that can pay the premiums during the duration of a disability or illness so that the policy will not cancel during those difficult times. Many term policies offer some “living benefits” for no extra fee, but keep in mind the premium will be a little more.

Many term policies offer some “living benefits” for no extra fee, but keep in mind the premium will be a little more than a term policy that doesn’t offer access to cash during an illness. The majority of carriers offer the terminal illness benefit rider at no extra charge, which will pay a percentage of the death benefit upon a doctor’s diagnosis of an illness that will lead to death within 12 months or less.

There are some carriers that will include chronic illness as a living benefit, which will pay a percentage of the death benefit in monthly increments to cover the expenses of caretakers and other expenses when the insured is not able to perform 2 of the 6 Activities of Daily Living (eating, bathing, toileting, dressing, transferring and continence) or becomes cognitively inept. Also, a percentage of the death benefit is given in a lump sum by some carriers when the insured has a qualifying critical illness, such as a heart attack, stroke, renal failure, cancer, paralysis, etc. (possibly up to 30 more conditions specified in the policy). This Living Benefit option makes term policies much more valuable for the duration of the term. Without Living Benefits, a term policy is good only If the insured dies during that term period.

The latest figures report that 99 percent of term policies never pay out a death benefit because most policyowners stop paying the premium. If a person who is 30 years old takes out a 30-year term policy the likelihood of death in those 30 years is much lesser than he or she is contracting a chronic or critical illness that doesn’t result in death during that term. Term policies will often get a bad rap because people are accustomed to talking about the old term policies that don’t offer living benefits. Don’t think they are a bad investment just because 99% of them don’t end with a death benefit being paid out.

Term policies have value because of the protection and peace of mind they offer for a low monthly fee. The policies are designed to pay a large death benefit during the term period, and many of them will provide access to a lot of cash in the case of a significant illness or injury. Term policies may not be as attractive as permanent policies that have cash value and offer a death benefit for when a person dies, but they are very affordable and provide tremendous value when tragedy strikes. It’s a good idea to keep paying premiums on at least some of your term policy for the duration of the term.


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