Term Life Insurance: A Straightforward Guide [2021]

Term Life Insurance Guide

If someone asked you, “what is life insurance?”, what comes to mind first?

There’s a good chance that you’re thinking of term life insurance, as opposed to other policy types, such as whole life or universal life, or variable life insurance  (which are all considered permanent life insurance).

Perhaps something along the lines of this:

You make monthly payments to an insurance company for a certain number of years.  In return, the insurance company agrees to pay your loved ones a sum of money if you die during that period of time.  If you don’t, the policy expires, and each party goes its own way.

In this guide, we’ll take it one step further and discuss several types of term life insurance.

The Four Types Of Term Life Insurance

 There are four types of term life insurance:

  1. Level premium 
  2. Yearly renewable
  3. Return of premium
  4. Guaranteed issue

All of them provide life insurance coverage for a specified length of time (this is called the “term”).

However, they differ in terms of how strict their approval criteria are how premiums change over time.

Type Key Features Our Take
Level Premium
  • Premiums flat for entire term, even if health changes
  • Best option by far, unless you're in poor health
Yearly Renewable
  • Re-priced yearly (no medical exam)
  • Premiums increase every year as you age
  • If coverage needed > 5 years, avoid at all costs; "level" policy will be cheaper
  • "Level" policy will be much cheaper for the same benefits
Return of Premium
  • Premiums returned if you live to end of policy
  • Premiums ~4x "level" = high cash outflow
  • Avoid, unless certain you will live to end of term AND you're okay with cash outflow
  • If not, overpaying for death benefit by 4x
Guaranteed Issue
  • Guaranteed approval
  • No medical exam = high risk assumed = high premiums  
  • Avoid, unless you are in poor health and will be denied for level policy

Level Premium Term Life Insurance

“Level premium” term life policies are the simplest and most common form of life insurance.

Your monthly premiums stay the same for the entire term of your policy.

Let’s say you’re 35 years years old and looking for a $1 million policy that will cover you for 30 years (in other words, the policy has a 30-year “term”).

After underwriting, your life insurance company prices your policy at $40/month.  If you have a “level premium” policy, your premiums will be $40 every month for all 30 years.

No matter what has happened to your circumstances or health.

If you change careers from being a babysitter to working on an oil rig in the Gulf, your premiums will stay $40/month.

If you get addicted to alcohol and your liver is on its last legs?  $40/month.

women growing up

As long as you continue to pay your monthly premiums (in other words, you don’t “lapse” on your policy), your insurance company will be obligated to cover their oil-rig-working teetotaler with $1 million of life insurance coverage.

Yearly Renewable Term Life Insurance

The second type of policy is also called a “yearly renewable” term policy.

This policy covers you for one year at a time. Each year, for the term of the policy, you have the option to renew without a medical exam (but at a new, significantly higher cost each year).

Compared to a traditional “level term” policy, your premiums will be lower at first, but over the full 10-, 20-, or 30-year term, you pay much more than in total.

Year Renewable Term: Pros & Cons

If you’re asking yourself, “why would anyone buy a yearly renewable policy,” you’re not crazy.

Let’s take a look at the pros and cons of “renewable term.”

The Pros

The Cons

In short, "yearly renewable" makes sense in one scenario. You need coverage for a short amount of time, and this need is sure to be temporary (i.e., you know you will not need coverage down the road).

Return of Premium Term Life Insurance

With the third policy type, called “return of premium” term life insurance, if you live to the end of your term, you receive all (or a portion of) your premiums back.

Let’s say you buy a 20-year, $1 million term policy at 35 years old.  Your quoted premium rate is $200 per month.

If you are still living 20 years later (at the end of your term), your coverage will expire and your insurance company will return the premiums you paid.  I.e., they will pay you a lump sum of $48,000 ($200 * 12 months * 20 years). 

What’s the catch?

The only “catch” is that your monthly premiums will be ~3-4 times what you would pay for a similar level term policy.

For a standard, 20- or 30-year term policy, this adds up to a lot of cash out the door.  (Cash on which you’re not earning interest.) 

And even worse, if you lapse on your policy, you get nothing back.

For example, if you face financial hardship (e.g., due to a job loss), and you can’t make your premium payment one month, your coverage will expire, and your insurance company will keep any premiums you’ve paid to date.

Guaranteed Issue Term Life Insurance

A guaranteed issue policy is the easiest type of term life insurance policy to get.

As the name suggests, you are guaranteed approval.

Guaranteed issue policies do not require a medical exam and ask very few, if any, health questions.

Of course, the insurance company needs to make money…

How do they do that?  They assume anyone applying is a risky prospect, and set policy premiums high enough to account for that.

In other words:

If your health is average or better, you should avoid guaranteed issue policies, as your premiums will be significantly lower with a conventional term policy.

Conclusion

Whether you’re a college senior graduating with student loans, a senior citizen preparing for end-of-life expenses, or anywhere in between, term life insurance can be a valuable asset.

If you are interested in purchasing term life insurance, check out our reviews of Ladder Life Insurance and Haven Life Insurance, two online term life insurance companies we recommend highly.

And finally, if you have any questions about what we covered here, please don’t hesitate to leave a comment below or send us an email at hello@getsure.org.

Warm Regards,
The GetSure Team

RJ

RJ

RJ is the Founder & Head of Content at GetSure. He is a licensed life, accident & health insurance agent, with over 10 years of experience in the financial services industry. He holds a B.S. in Applied Mathematics from Columbia University and an MBA from The Stanford Graduate School of Business.
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