We actually get a lot of questions about term policies. The first questions that many people ask us are very simple. They ask what we mean when we say things like 20 year term or 30 year term. They really do not understand what this means.
Perm Vs. Term
It is probably easiest to understand if you compare it to other forms of life policies. Some policies are permanent. Examples of this would be whole or universal life. These policies will stay in force as long as they are paid for or paid up. They may also grow a cash value that can be borrowed against, cashed in, or even sold.
But a term policy is a temporary policy. Keep in mind, though, that the term can last for decades. So, for example, a 10 year term policy would be written to cover a person for exactly 10 years from the date of issue. After the policy ends, there is no cash value.
So in the simplest terms, you purchase a term policy to cover your life for a very specific period of time. This time time period is estimated to be the length of time you need the coverage. Some examples of this may be buying a policy to cover a home owner while a mortgage is getting paid off. Sometimes this is called mortgage protection insurance. If a home owner is responsible for paying off a twenty year mortgage, they may want to buy a twenty year policy in order to cover their lives and protect their family home.
Term Is Cheaper
Because it is a temporary policy, and because it does not grow a cash value, term premiums are usually much lower than whole or universal life premiums. And because it is cheaper, it may allow you to afford a larger death benefit. The lower price is one reason that many people are attracted to it.
I just want to make sure that people understand why term life is cheaper so they are spending their money for the right type of policy.
Is Term Life Better?
Every family has different needs, budgets, and financial goals. I cannot say which type of policy is better. If you need to purchase a larger face value policy now, but think your need for coverage will be lower later, then you may consider term.
There are some ways to make your policy more flexible too. You can add riders (options) to some coverage that may help you get more benefits. One rider is called Return of Premium (ROP). This costs a bit more, but it returns all of your premiums at the end of the contract. This turns your term policy into a sort of hybrid policy which actually does grow a cash value.
One other option to consider is the ability to convert your policy to a whole life policy later. That way, you can buy your cheaper term life now. But if your needs change in a few years, you have the option to exchange it for permanent protection without having to go through health underwriting again.
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