Insurance is a simple fact of life — we buy health insurance to protect our bodies, auto insurance for our cars and homeowners insurance for our houses. Life insurance is unique in that it’s not intended to protect your possessions, instead you buy it to protect those closest to you by leaving them a sum of money in the event of your death.
Life insurance policies can seem complicated. You’ll likely end up choosing between two different kinds of coverage: permanent, or whole, life insurance and level term, or term, life insurance. As the name implies, term coverage offers you protection for a certain period of time. Term life insurance is more affordable than a permanent policy, making it easier to provide protection for your family.
Here, we review the different types of term life insurance to help you decide which term life insurance policy is best for you.
Level Term Life Insurance
With level term life insurance, or simply term life insurance, your policy will expire after a predetermined number of years (the “term”). This policy is not permanent, but the death benefit and the premium rate stay the same for the entire term of the policy. Your premium payments will not go up or down and your coverage will stay the same.
Unlike a whole life insurance policy, level term policies do not have any cash value. The cash value of a permanent, or whole, life insurance policy works a bit like a bank account that allows you to take withdrawals from the policy or loans against the policy. Level term policies do not hold cash value.
Often, this type of term life insurance policy is appealing because the benefits and costs are predictable and generally affordable. With this type of policy, you will know exactly how much coverage you have, how long your policy is in place and how much it costs. This is the most common type of term policy sold.
Supplemental Term Life Insurance
As its name suggests, supplemental term life insurance is an additional form of life insurance. It’s not meant to take the place of a good term life insurance policy or a whole policy, but instead is designed to give your family additional coverage should something happen to you. There are two ways to obtain supplemental term life insurance: through your employer or privately.
- Employer-provided Supplemental Life Insurance
Some employers offer both term life insurance and supplemental life insurance. The limits through your employer can vary quite a bit from employer to employer but there are often some limits to these types of policies and you’ll want to read up on what those limitations are. For example, employer-provided supplemental life insurance policies may be specifically for accidental death and dismemberment (AD&D), meaning they’ll only cover you for a death caused by an accident. Other plans are strictly for burial insurance, meaning they’ll offer a very limited amount of coverage (between $5,000 and $10,000) and will be designed to cover burial and funeral services.
- Private Supplemental Life Insurance
This type of term life policy allows you to buy a supplemental plan off the private market, making it very similar to buying a level term life insurance policy. However, supplemental policies often have more limitations than a level term policy. One of those limitations may be that it has a graded or modified death benefit. In order for the full amount to be paid, you must live a certain number of years after purchase. You can purchase these supplemental policies for burial insurance or AD&D insurance. The key advantage of a private supplemental life insurance policy is that it’s portable and you can keep the coverage for as long as you are paying premiums, meaning it does not have term limits. This type of coverage can also be cheaper but provide you with some additional coverage.
Group Term Life Insurance
Similar to a supplemental term life insurance policy, group term life insurance is a benefit often offered by employers for their employees. Often, a group term life insurance policy will offer greater coverage and more options than a supplemental plan through your employer. Some employers provide this type of term life insurance coverage at no cost. It’s unlikely that a group term life insurance policy would meet all your needs but it’s an important part of your overall financial situation. The amount of coverage offered through a group plan varies widely among employers, and it may also differ depending on where an employee falls within their organizational hierarchy. Often for group plans, all employees are typically automatically enrolled at the base coverage once they’ve met eligibility requirements. Additionally, some plans offer the option to purchase additional or even permanent coverage with simplified underwriting. It also may allow the employee to buy a limited amount of group coverage for their spouse and children.
Convertible Term Life Insurance
A convertible term life insurance policy can be converted by the owner into a permanent, or whole, life insurance policy during a specific period of time, without requiring an exam. These policies are a great way to enjoy the lower premiums of a term policy now, while having the peace of mind knowing you can easily convert the policy to a permanent policy at a later date. There are many reasons to convert your term policy to a whole policy, including the ability to maintain your health rating from your term policy, meaning you won’t need another health exam. When you convert your term policy to a whole policy, you’ll have coverage for the rest of your life, even if you become uninsurable later in life.
Get the Right Fit
With many options available, your Farm Bureau agent can help you determine the right fit for you and your family. Your agent can take the guesswork out of choosing life insurance and help you customize a policy that works for you.