The limited-term life insurance policy is an insurance product that offers a death benefit to the insured party in the event of their death during the specified term. Because there is an expiration date on limited-term life insurance, it is generally less expensive than forms of permanent coverage such as universal and whole life insurance that do not expire.
What is Limited-Term Life Insurance?
A life insurance policy is essentially life insurance, where the benefit is paid out upon the death of the insured individual. Purchasing a life insurance policy is a strategy you can use to protect the people who depend on you financially in the event of your death. Instead of monthly or annual premiums, your family will receive a death benefit that is generally larger than the total premiums (if you die while holding an active policy).
How Does Limited-Term Life Insurance Work?
The majority of limited-term life insurance policies are “fixed term,” meaning that the benefit amount remains constant throughout the term. However, some policies offer a “decreasing” benefit, meaning the benefit amount declines regularly at specified intervals (usually once a year).
If you are considering purchasing a life insurance policy, you will need to start by determining the death benefit amount you wish to provide for your beneficiaries and for a specified period. Look at your family’s financial resources, as well as any debts you would like to pay off, such as a mortgage. The value of the death benefit, or face value of the policy, is a significant factor in determining how much you will pay in premiums. The insurance company will also take into account factors such as:
- Duration of the term
- Age, gender, and health
- Occupation
- Lifestyle and habits, including smoking and high-risk hobbies
- Driving history
- Medications
- Family health history
If you die during the term of the policy, the insurance company will pay the death benefit to your beneficiaries. Generally, life insurance proceeds are not subject to taxation by the Internal Revenue Service, meaning your family can rely on the full value of the policy as a benefit.
However, if the term expires before your death, and there is no renewal clause, the policy ends, and the insurance company will not pay a death benefit to your beneficiaries.
For example, let’s assume that Pat, a 30-year-old non-smoker in “average” health, purchases a limited-term life insurance policy with a face value of $250,000 for 20 years at a cost of $325 per year. If Pat dies during the 20-year term of the policy, the beneficiaries will receive the full death benefit amount of $250,000. However, if the policy expires, Pat will have to purchase a new policy to maintain the death benefit.
Advantages and Disadvantages of Limited-Term Life Insurance
Advantages
- Affordable
- Coverage for the most financially sensitive years
Disadvantages
- Coverage is not lifelong
- No cash value accumulation
The advantages are explained as follows:
Affordable: Insurance customers can generally afford higher death benefits with limited-term life insurance compared to permanent life insurance. For example, a 30-year-old person who wants to spend less than $1,000 annually on life insurance premiums may be able to purchase a 30-year limited-term life insurance policy with a death benefit of $500,000 within that budget.
Coverage for the most financially sensitive years: Limited-term life insurance typically provides a safety net during the years when families need it the most. If you purchase a limited-term life insurance policy for multiple decades when your children are young or you have a significant mortgage, you can feel confident that there will be enough money to educate your children or pay off the house even if you pass away.
The disadvantages are explained as follows:
Coverage is not lifelong: Limited-term life insurance coverage is only available for the duration of the term, which can leave customers without coverage when they need it. To maintain coverage after the term expires, you will need to convert to a new policy or renew the current coverage (if the policy has a renewal clause). In either case, your premiums will increase.
No
There is a cash value accumulation: with term life insurance, you will not get back the money you spend on premiums unless you die during the term. However, whole life insurance has a cash value in addition to the death benefit. The premiums you pay toward a permanent life insurance policy go toward both the death benefit and an investment or savings account that you can access after a certain amount of time has passed.
Term Life Insurance vs. Universal and Whole Life Insurance
Term life insurance is considered the most economical option, as the insurance company is betting on your survival during the term. This means you can expect a higher death benefit for a lower premium with term life insurance compared to permanent coverage.
On the other hand, permanent insurance is designed to last throughout your life. As a result, insurance companies charge higher premiums initially to accommodate the rising insurance costs as you age.
Key Takeaways
Term life insurance provides a death benefit to the beneficiaries of the insured person during a specified period. Since term life insurance only pays out if the insured person dies within the policy term, it is less expensive than permanent life insurance. Unlike permanent life insurance, term life insurance does not typically provide cash value. If you do not die during the term, the money you spend on premiums, in most cases, will simply be lost. The best rates for term life insurance policies go to young and healthy individuals, and the costs increase with age and the presence of medical conditions.
Once the term ends, you will need to purchase another term life insurance policy or renew the coverage if it’s an option, to maintain the same benefit, and regardless of the situation, your premiums will increase. Generally, term life insurance is a good option for providing financial protection for families with children.
Source: https://www.thebalancemoney.com/term-life-insurance-what-is-it-5094214
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