Term Life Insurance
Term life insurance is life insurance which provides coverage at a fixed rate of payments for a limited period of time, the relevant term. After that period expires coverage at the previous rate of premiums is no longer guaranteed and the client must either forgo coverage or potentially obtain further coverage with different payments and/or conditions. If the insured dies during the term, the death benefit will be paid to the beneficiary. Term insurance is the least expensive way to purchase a substantial death benefit on a coverage amount per premium dollar basis over a specific period of time.
Term life insurance is the original form of life insurance and can be contrasted to permanent life insurance such as whole life, universal life, and variable universal life, which guarantee coverage at fixed premiums for the lifetime of the covered individual. Term insurance is not generally used for estate planning needs or charitable giving strategies but for pure income replacement needs for an individual. Many permanent life insurance products also build a predetermined cash value over the life of the contract, available for later withdrawal by the client under specific conditions. However, on most cash value policies like Whole Life insurance, the only way to receive the cash value is to cash out the policy. The beneficiaries receive the face value of the insurance but not the cash value with Whole Life policies. Some financial advisers advise buying term life insurance and investing the difference elsewhere to those who still qualify to contribute to other tax-deferred investment growth such as IRA's or 401k's, but this strategy can backfire if you need to renew and are unable to do so due to health reasons.
Term insurance functions in a manner similar to most other types of insurance in that it satisfies claims against what is insured if the premiums are up to date and the contract has not expired, and does not expect a return of Premium dollars if no claims are filed. As an example, auto insurance will satisfy claims against the insured in the event of an accident and a home owner policy will satisfy claims against the home if it is damaged or destroyed by, for example, a fire. Whether or not these events will occur is uncertain, and if the policy holder discontinues coverage because he has sold the insured car or home the insurance company will not refund the premium. This is purely risk protection.
Term insurance can help you meet a number of personal and business needs and is often a good choice
- Most economical form of life insurance
- when life insurance is essential but dollars are scarce
- for a well-defined period of time: one, five, 10 years or longer
- to protect your family (insurance benefits can help pay a mortgage or fund a child’s education)
- to protect your business (benefits can ensure business continuation by helping to cover business expenses)
- Guaranteed death benefit within the specified term
- No return of investment at the end of your term
Five main types of term life insurance
- Renewable
- Level
- Decreasing
- Convertible
- Return of Premium
Level Term Level term life insurance policies provide a fixed amount of coverage with premiums that remain stable over a certain period of time, usually in five- to 10-year increments. Common durations for level term insurance include:
- 10-year term
- 15-year term
- 20-year term
- 25-year term
- 30-year term
Decreasing Term A decreasing term life insurance policy provides benefits that gradually decrease in value over the term of the coverage. The monthly premiums will remain the same, but the amount of coverage provided will go down in value. Many policy holders use benefits from decreasing term insurance coverage to pay off mortgages, which also tend to gradually decrease over time.
Convertible Term Convertible term life insurance gives policyholders the right to exchange their term policy for a permanent or cash-value policy, without a required medical exam or other evidence of insurability. Many people purchase convertible term life insurance when they are younger, because the premiums are cheaper than standard term life policies but the coverage generally is the same. Later in life, convertible term policy holders may find the coverage is no longer enough to adequately protect them, so they decide to convert their coverage and upgrade to a permanent or cash-value term policy.
However, bear in mind that converting a term policy to a type of permanent life insurance generally results in a higher monthly premium. Also, the amount of time allowed by carriers to convert policies is shorter than the duration of the term coverage, so be careful not to let a conversion deadline pass.
Return of Premium (ROP) In most types of term life insurance, if an insured has not filed a claim by the time the policy term expires, there is no refund of monthly premiums paid during the term. However, return of premium term life insurance gives back to policyholders the amount of premiums paid at the end of the policy term, minus any administrative charges, fees, or other costs.
Monthly premiums for return of premium insurance policies are often significantly higher than for policies without the repayment feature and generally, insured parties are required to keep the policy in force to the end of the term or forfeit the return of premium benefit.
ROP Benefits
- Solid coverage for the term you select (20, 30, even 35 years)
- A fixed monthly premium that does not change during the selected period, even as you get older or if your health declines.
- Full benefits to your loved ones if you should die.
- Can return an amount equal to the premiums you paid when the level premium period ends, if you are still living and you've kept the policy in force.
Should you have any questions or concerns about whether Life Insurance is right for you, please take a moment and contact us on the Home Page or under the More/Contact drop down menu.
