A term life insurance policy can help to provide for your family if you’re no longer around to take care of them. You may be thinking about purchasing a term life insurance policy to make sure that your loved ones are able to pay off a mortgage, cover living costs, or take care of your final expenses.
Term life insurance is one way to provide this additional layer of protection, so that your loved ones have a financial cushion to fall back on when you’re gone. We’ll cover how term life insurance works, the different types of term life insurance available, and what you should consider when choosing a policy.
8 term life insurance types to know
1. Level term life insurance
Level term life insurance is one of the most straightforward types of life insurance. This policy features level monthly premiums that stay the same over the course of the term. Your death benefit (the payout your loved ones get) also stays the same. Term limits typically depending on your insurer; with Lemonade’s term life offering, you can choose terms between 10 and 30 years.
One of the attractions of level term life insurance is its simplicity: You’ll know exactly what your benefit is, and how long you’re covered for, and how much you’ll need to pay each month. For many people looking to purchase coverage for themselves and their families, level term life insurance may be a good option.
If you’d like to see if you qualify for Lemonade’s term life offering, just click the button below to get started—we’ll ask you a few simple questions, and there’s no medical exam required.
2. Convertible term life insurance
Convertible term life insurance gives you the option to convert your policy to a permanent life insurance policy at the end of your term length. In many cases, you may not be required to undergo a medical exam.
Convertible term life insurance can be an intriguing option if you want to ensure that you’ll have continued coverage even after the term ends—but keep in mind that your premiums will likely be much higher after you convert your policy.
3. Renewable term life insurance
Renewable term life insurance gives you the option to renew your policy coverage after a certain period of time—often every year. This is a good option if you’re not sure how much coverage you need, or if you’re not sure how long you’ll want coverage for.
However, your premiums will likely increase each time you renew, especially if you’ve developed any health issues in the meantime. And many renewable term life insurance policies only cover customers up to a certain age, generally around 70.
4. Increasing term life insurance
With an increasing term life insurance policy, your benefit will increase over the course of the term. Depending on the policy, your premiums may also increase.
Why purchase this type of term life insurance? Some of the benefits of increasing term life insurance include protection from inflation along with a benefit that grows along with your spending. That could be a good fit whether you’re planning to purchase a house, start a family, or anticipate increasing medical costs.
Keep in mind, however, that increasing term life insurance policies are often more expensive than traditional level-term policies.
5. Decreasing term life insurance
Decreasing term life insurance works in the opposite way to increasing term life insurance: Your death benefit decreases over time. In some cases, your premiums may also decrease.
Decreasing term life insurance isn’t a great fit for everyone, but it could be the right choice if you currently have a big financial burden that you expect to lessen over time as you pay it off, like a mortgage.
Similarly, if your main goal in purchasing life insurance is to provide for beneficiaries like your children or other dependents, you may need less coverage over time as they get older and leave home.
6. Return of premium term life insurance
Like it says on the tin, return of premium term life insurance returns your premium to you at the end of the term. This may sound like a good deal, but there are a few drawbacks: Return of premium term life insurance is much more expensive than a typical term life insurance policy, and the premiums you get back will have lost value over time due to inflation.
Plus, some would argue that if you were to invest the funds you’d otherwise be putting towards higher premiums into something like a mutual fund, you might make a significantly better return. It’s a good conversation starter for you and your financial advisor, if you have one.
7. Deposit term life insurance
Deposit term life insurance requires a large deposit paid over the course of the first year of the policy. After that, your premiums will be lower. In essence, deposit term life insurance allows you to pay up-front for life insurance coverage, in exchange for more affordable premiums down the line.
Unlike other types of term life insurance, the deposit will earn interest over time. At the end of your policy term, you can opt to withdraw your deposit with interest, or use it to purchase a new policy. However, if you stop making monthly payments, you’ll lose your deposit. While deposit life insurance has some advantages, you may be better off investing on your own.
8. Group term life insurance
Group term life insurance isn’t exactly a “type” of life insurance policy. Instead, it refers to how you get your life insurance policy––in this case, it’s generally through your employer.
Rather than purchasing an individual policy from a life insurance company, you’ll purchase one together as part of a group. This may mean that you get access to discounted rates or additional benefits.
However, group term life insurance may not be as flexible or customizable as an individual policy. And the death benefit is almost always more modest—perhaps a multiple of your annual salary.
So…which type of term life insurance is right for me?
There’s no one-size-fits-all life insurance policy. Depending on your financial needs and goals, a different flavor of term life might appeal to you. Lemonade only offers “level term” policies, and we do so because they tend to be fairly intuitive, and generally affordable. That said, have a chat with your loved ones—and perhaps a financial advisor—to figure out the ideal policy for your lifestyle.
How term life insurance works
Term life insurance covers you only for a specific term length—with Lemonade’s offering, you can choose a term between 10 and 30 years.
Term life insurance VS whole life insurance
Term life insurance covers you for the length of a pre-determined term, while whole life insurance covers you for as long as you continue to make monthly premium payments. Term life insurance is generally more affordable than whole life insurance. While there are some cases where whole insurance might be the better option, in many cases term life insurance may prove to be an economical and intuitive fit. Again, it depends on your personal situation, and it’s a good conversation to have with your financial advisor.
Term life insurance’s pros and cons
Here are a few benefits of a term life plan:
- Often more affordable than whole life insurance
- Simple, streamlined policies that you may find easier to understand
- Several different term life insurance options to choose from depending on your needs
And some potential downsides:
- Only provides coverage over the course of the term you select
- That means you’d need to purchase a new policy once the term is up
- Doesn’t build any cash value over time, which whole life insurance does
How much life insurance do I need?
How much life insurance you need depends on a number of factors, including whether or not you’re married or in a long-term partnership, have children (especially any with special needs), or currently support other family members or loved ones. If there’s someone else who relies on your income, life insurance may be worth the cost. A general rule of thumb is to purchase coverage equal to 10 to 15 times your annual salary.
The bottom line
Life insurance isn’t for you––it’s for your loved ones. Buying a life insurance policy is one way that you can give your family a financial cushion after your passing.
Here at Lemonade, we offer term life insurance policies with a quick and easy application process that takes just a couple of minutes, with no medical exam required, and premiums that start at just $9 per month. Interested? Get a quote today to see if Lemonade is a good fit!