- Life & Money
- Life Insurance
- Eileen Daily
- Nov 23, 2020
How Term Life Insurance Works
You’ve reached a place in your life where you’re thinking about your loved ones and what you can do to protect them. A term life insurance policy is one way to help ensure financial security for your loved ones. It can also be an important part of your larger financial plan.
Term life insurance is a straightforward and easy-to-understand concept. You pay into a policy for a period of time while you’re alive to ensure your loved ones receive a death benefit if you die during that time period.
HOW TERM LIFE INSURANCE WORKS
Term life insurance, sometimes called annually renewable term life insurance, may be more flexible within your financial plan than you think. Here’s how term life insurance works.
The cost of your coverage will increase as you get older. With term insurance, the cost you pay each year is based on your age. When you’re younger, term life insurance is less expensive. But as you get older, the cost of your insurance will increase.
Your coverage will end someday. Unlike permanent life insurance, which never expires, a term life insurance policy will end at some point in the future. You can usually keep your policy for a certain number of years (e.g. 10 years) or until you reach a certain age, like age 80. However, as you get older, it may be expensive to do so.
You can convert to permanent insurance in the future. The death benefit of permanent insurance never expires, and a permanent policy has additional benefits that you can use during your lifetime. Because of this, many people use permanent insurance as a stable financial planning tool that can serve many needs. You may be able to convert some, or all, of your term insurance over time without needing to re-qualify for coverage — even if your health has changed.
You can make changes in the future. Whether you need to change your beneficiaries or make changes to the amount of coverage you have, your policy can be updated. It’s a good idea to meet with your financial representative on a regular basis to ensure that your policy still suits your current needs.
You may receive dividends. At Northwestern Mutual, our premiums are based on certain assumptions, like how many death claims we expect to pay in a year. Whenever the company performs better than we assumed, we may pay a dividend to our policyholders (which we’ve done every year since 1872)1. With term insurance, dividends are used to reduce your premiums.
The insurance company may pay your premiums if you become disabled. If you have the optional Waiver of Premium benefit on your term policy, and you become totally disabled, the insurance company will pay the premium for you. In addition, you may be able to convert your term insurance into a permanent policy and the company will pay those premiums during your disability. The permanent policy will build cash value, which you will be able to access throughout your life.
WHEN TO REVIEW YOUR TERM LIFE INSURANCE
The good news is that your term insurance is likely something you won’t make many changes to over the years. But there are a few times when you may want to reach out to your financial representative to review your policy:
Changes in your family situation. When you have a change in your family situation, like a divorce or the birth of a child, you may want to review your policy to make sure the beneficiaries listed are still correct.
Changes at work. Over time, there’s a chance that your income will increase, perhaps substantially. As it does, you may want to add to your insurance coverage in the future. Also, if you get some of your life insurance through work, make sure to pay attention to any changes the company makes to your life insurance benefit.
As your financial plan changes. When you first get insurance, you may have little savings and a tight budget. Eventually, your savings will grow and your mortgage will shrink. As this happens, you may want to eventually reduce your death benefit or consider converting some of your term insurance to a permanent policy.
Your life is hectic and busy enough without the added stress of worrying about your loved ones’ future financial security. With term life insurance in place, you know that your family is protected, which lets you get back to the things that matter most.
1Dividends are not guaranteed.
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