Term life insurance is a form of life insurance. It provides coverage for a predetermined and limited period of time known as the relevant term. The coverage provided is payment coverage at a fixed rate. When the term expires, the individual’s coverage at the previous premium rate is no longer guaranteed.
The client will be forced to cancel their term life insurance coverage or obtain a different policy with different payments and terms. If the insured person dies during the term, the death benefit amounts are paid to the insured person’s beneficiary. Based on the premium cost, this term life insurance proves to be the most cost-effective way of purchasing a large dollar value of death benefit coverage.
Understanding Term Insurance
Term life insurance was the first type of life insurance developed, and it contrasts with permanent forms of life insurance such as universal life, whole life, and variable universal life. These types of coverage guarantee a person fixed premiums that cannot be increased for the rest of his or her life.
People do not typically use term insurance for charitable giving strategies or estate planning needs. Instead, they consider the need to replace an income if a person dies unexpectedly on his or her family.
Many permanent life insurance policies also have the advantage of increasing in value over the course of the person’s contract. This cash value can then be withdrawn by the policyholder if certain conditions are met. In most cases, withdrawing these cash amounts terminates the policy.
Beneficiaries of permanent life insurance products receive the face value of the insurance policy but not the cash value upon the death of the policyholder. As a result, financial advisers will recommend that people buy term life insurance for their insurance needs and then invest the money saved over permanent products in retirement accounts that offer tax-deferred contributions and investment gains, such as 401ks and IRAs.
Term life insurance, like most insurance policies, pays out claims for the insured as long as the contract is current and the premiums are paid on time. If no claim is filed, the premium is not refunded to the policyholder.
This makes term life insurance similar to homeowners’ insurance policies that pay claims if a home is destroyed or damaged by fire, or car insurance policies that pay drivers if they are involved in a car accident. When a product is no longer required, premiums are not refunded. As a result, term life insurance, like these other products, only offers risk protection.
Types of Term Insurance
There are various types of term insurance besides the level term policies we’ve outlined so far. Each policy has its pros and cons, depending on the needs of the policyholder.
Term insurance can be purchased so your premium adjusts (increases) annually or after 5, 10, 15, or 20 years. The less frequently your premium adjusts, the higher the initial premium and its incremental increases will be. (Remember, as you get older, the risk of dying increases, so the cost of your insurance goes up.)
A convertible term life insurance policy allows a policy that expires in a limited number of years to convert into a permanent or whole life plan. Convertible insurance has the major advantage of not requiring a medical exam and not considering any medical conditions when the term policy converts to permanent coverage.
Death benefits can be increased over time under some policies. It also increases premiums, but policyholders can pay lower premiums in the early years of their lives when they have many bills and expenses. Traditional term insurance would require you to qualify for another policy at an older age to receive the added benefit, but increasing terms do not require this.
Mortgage Term or Decreasing Term
The death benefit amount on a mortgage term or decreasing term policy decreases over time as opposed to an increasing term policy. As the policyholder’s mortgage debt decreases, the term benefit declines as well. This strategy is based on the notion that if you have less mortgage debt, you need less life insurance. In spite of the smaller premiums, even as the benefit decreases, the premium payments remain the same.
Each year, the term insurance policy is renewed, but at a higher premium since the policyholder is getting older. The advantage of annual renewable term insurance is that the coverage is guaranteed to be approved every year. The increased costs over time, however, may not make it the most cost-effective solution.
Guaranteed renewability, which is standard practice on better policies, assures that the policy can’t be canceled because of poor health. Don’t buy a life insurance policy without this feature unless you expect that your life insurance needs will disappear when the policy is up for renewal.
Where Can You Buy Term Insurance?
A number of sound ways to obtain high-quality, low-cost term insurance are available. You may choose to buy through a local agent because you know him or prefer to buy from someone close to home. However, you should invest a few minutes of your time getting quotes from one or two of the following sources to get a sense of what’s available in the insurance market. Gaining familiarity with the market can prevent an agent from selling you an overpriced, high-commission policy.
Here are some sources for high-quality, low-cost term insurance:
- USAA: This company sells low-cost term insurance directly to the public. Contact USAA by phone at 800-531-8722 or visit www.usaa.com/inet/wc/insurance_life_level_term. Insurance agency quotation services: These services provide proposals from the highest-rated, lowest-cost companies available. Like other agencies, the services receive a commission if you buy a policy from them, which you’re under no obligation to do. They ask questions such as your date of birth, whether you smoke, some basic health questions, and how much coverage you want. Services that are worth considering include
- AccuQuote: Phone 800-442-9899; website www.accuquote.com
- ReliaQuote: Phone 800-940-3002; website www.reliaquote.com
- Term4Sale: Phone 888-798-3488; website www.term4sale.com (this company doesn’t sell life insurance but can provide quotes and refer you to three agents in your area who do)