Life is good but quite short, and the scariest part is that we do not know how short it can be. Life can be cut short when one thinks they have a long time left. To protect one’s beneficiaries, some people often opt to take life insurance. Among different types of life insurance is term insurance coverage. While taking life insurance coverage, one must understand how does term life insurance work.
How term life insurance works is different from how permanent life insurance works. This is due to its coverages and cash accumulation considerations. Because of its limitations, some insurers convert their term life insurance policies into permanent life insurance.
How Does Term Life Insurance Work?
Term life insurance starts when you apply for a life policy cover. Here, you identify an insurer and submit an insurance application. On receiving such an application, the insurer will engage you through health assessment, lifestyle audit and other health-related risk factors.
When compiling data collected from such an assessment, your insurer will determine how risky you are as a policyholder. This will be followed by determining the fair enough premiums payable.
Term life insurance pays your beneficiaries a certain predetermined sum in case of your demise. This is called the death benefit. The death benefit is only affected in the event of your death during the policy’s term. This death benefit is usually a tax-free lump sum payment to beneficiaries.
The death benefit paid to your beneficiaries cushions them against anything destabilizing their financial stability after your demise. For instance, it can be sued to pay off debts or even fund the education of your beneficiaries.
Term life insurance remains valid for a certain specified coverage duration. This differentiates term life insurance from permanent life insurance. If your demise expires after the term, your beneficiaries will not receive the specified death benefit. This is because term life insurance has no cash value.
In an attempt to cushion your beneficiaries, some term life insurance policies may offer to your policy after expiration. Others will suggest converting the policy to a permanent life insurance policy, although such options may have additional costs.
If your life insurer accepts to renew your life policy, premiums may increase based on your age at the time of renewal. If they have accepted conversion to permanent life insurance, some may or may not need you to undergo yet another medical examination.
Difference Between Term and Permanent Life Insurance
1. Duration of coverage
Term life insurance will cover you for a specified term, say ten, twenty, or thirty years. If the policyholder dies amid the term, a death benefit is paid to beneficiaries. On the other hand, permanent life insurance provides coverage for the insured’s entire lifetime. This remains the case, provided premiums are paid whenever they are due.
2. Cost of premiums
Term life insurance is typically less expensive compared to permanent life insurance. Premiums in term insurance remain constant for the insurance term. However, they can increase during policy renewal or even conversion to permanent life insurance. In contrast, permanent life insurance premiums are generally more expensive and remain constant throughout the policyholder’s lifetime.
3. Cash accumulation
Term life insurance does not have any cash value accumulation. You cannot withdraw during the policy term if you are the insured.
On the contrary, a permanent life insurance policy has a cash value accumulation component. A partial premium goes into a cash value account. This cash account grows on a tax-deferred basis. As a policyholder, you can access the cash value by withdrawing some amount or loans during your lifetime.