Term life insurance is life insurance that provides coverage at a fixed premium for a limited period of time. Thus, the word “term”. After that term expires, coverage at the previous rate of premium is no longer guaranteed and the client must allow coverage to “terminate” or one could obtain further coverage with different payments 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 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 unless the policy owner allows the policy to lapse. Term insurance is not generally used for estate planning needs or charitable giving strategies but is used for pure income replacement needs for an individual. 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 provide for 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. If the policy holder discontinues coverage because he has sold the insured car or home, the insurance company will not refund the full premium. Term Life Insurance is purely risk protection.
The most common terms are 10, 15, 20, and 30 years. In this form, the premium paid each year remains the same for the duration of the contract. This cost is based on the summed cost of each year’s annual renewable term rates, with a time value of money adjustment made by the insurer. Thus, the longer the period of time during which the premium remains level, the higher the premium amount. This relationship exists because the older, more expensive to insure years are averaged, by the insurance company, into the premium amount computed at the time the policy is issued.
Most level term programs include a renewal option, and allow the insured person to renew the policy for a maximum guaranteed rate if the insured period needs to be extended. The renewal may or may not be guaranteed, and the insured person should review the contract to determine whether evidence of insurability is required to renew the policy. Typically, this clause is invoked only if the health of the insured deteriorates significantly during the term, and poor health would prevent the individual from being able to provide proof of insurability. Often the rates are not affordable.
Most term life policies include an option to convert the term life policy to a Universal Life or Whole Life policy. This option can be useful to a person who acquired the term life policy with a preferred rating class and later is diagnosed with a condition that would make it difficult to qualify for a new term policy. The new policy is issued at the rate class of the original term policy. This right to convert may not extend to the end of the Term Life policy. The right may extend a fixed number of years or to a specified age, such as convertible to age seventy.
Term insurance, the most affordable type of insurance when initially purchased, is designed to meet temporary needs. It provides protection for a specific period of time (the “term”) and generally pays a benefit only if you die during the term. This type of insurance often makes sense when you have a need for coverage that will disappear at a specific point in time. For instance, you may decide that you only need coverage until your children graduate from college or a particular debt is paid off, such as your mortgage.
Term life insurance is often the most affordable coverage because it offers protection for a specific number of years. You may want to purchase a term life insurance policy to:
- Get valuable coverage at an affordable price
- To Provide a High Death Benefit for the lowest premium
- Perhaps proceeds to be earmarked specifically for income replacement
- Help cover specific financial responsibilities like a mortgage or college expenses
- Supplement a permanent policy or work policy
Term life insurance is designed to help people purchase the protection they need when they can’t afford to purchase permanent life insurance or when they only need coverage for a specific time period. Term life has a guaranteed death benefit but no cash value and the premiums will increase at pre-determined intervals such as after one year, five years, 10 years, or 20 years, depending on the kind of policy you purchase.
Term Life in a nutshell:
- Guaranteed term death benefit.
- Generally federal income-tax free death benefit.
- Premiums are usually guaranteed only for the initial term.
- Potential additional growth of policy value through dividends.
- Inexpensive initially, with costs increasing at each renewal point.
- You pay for pure death benefit protection for certain period, without cash value accumulation.
- Term conversion privileges are available with most policies, enabling you to convert to a permanent policy that builds cash value, with no additional medical underwriting.