Term Insurance provides coverage in the event of the insured’s death, but coverage applies only over a specified period of time, or Term. Typical terms are ten, twenty, and thirty years. Term insurance tends to be quite affordable, but the premium depends on state of health at time of application. A healthy person in her early thirties could pay less than $500 per year for a twenty-year, $1 million death benefit policy. An unhealthy smoker could pay multiples of that amount.
The downside with Term policies is that once they expire, the coverage disappears. If you die a day after coverage expires, your beneficiaries get nothing.
It’s important to plan ahead. If you opt for a twenty-year term policy when you’re thirty years old, it will expire when you’re fifty. Your annual premiums on a new policy at age fifty will be dramatically higher than your initial policy premiums, and you’ll have to undergo medical testing again. You’re much more likely to have a health issue at age fifty than at thirty, raising premiums even higher. The worst-case scenario may be that you’ll be deemed uninsurable after testing, leaving you without any protection.
On the other hand, if you make good financial decisions over those twenty years, you may have your home paid off, children’s college costs covered, and a tidy nest egg for retirement. At that point you may no longer care whether you’re insurable because you may not need the insurance. If you can’t quite get to financial independence at age fifty you could opt for a thirty-year term policy at age thirty, giving you until age sixty to reach financial independence.
Some term insurance is convertible—it can be converted at some future date to a permanent life insurance policy. This can be useful if you have interest in one or more of the permanent policy features. A common reason to make the conversion is to accumulate cash value (described in the permanent life insurance section). You may never want to own permanent insurance so the conversion option may seem irrelevant, but as long as it’s a free option it’s reasonable to simply accept it.