Term Life Insurance
Term Life
Insurance FAQs from Life Insurance Wiz: The Experts in Term Life
Insurance Quotes Information.
Why It's Called
"Term" .
Term
life insurance is called "term" because it provides coverage
for a specific period or term (most often 1, 5, 10, 15 or 20 years).
For this reason, it is also called "temporary" insurance.
If death occurs during the term, the policy pays cash benefits to the
beneficiary. However, once the term is over, and if the policy is not
renewed, the coverage ceases. If death occurs after te coverage
ceases, no cash benefits are paid out.
Term
insurance is the most straightforward type of life insurance and the
easiest to understand. Sometimes it is called "pure" insurance,
since the policy has no financial investment value and most of your premium goes to pay for coverage, with only a small amount used to pay the insurance
company's costs. If you are looking for the maximum amount of coverage
for your dollar, term life insurance will give you the most "bang
for your buck".
Different
Terms For Different Needs.
All
term life insurance policies cover you for a specific amount of time
- the term. The term that's right for you depends on how old your children
are, how many years before you retire, and other factors. Many people
like to know they're insured until they're ready to retire, usually
at age 65. Many just want to have insurance until their youngest child
graduates from college, and so they make sure their life insurance coverage
includes money to pay for all of the college tuition.
Most
experts agree that you should carry insurance at least until your youngest
child is 18. So if your child is 3 now, you would want to carry your
insurance for at least 15 years. But that doesn't mean you have to lock
into a 15-year term - you could instead buy an annual renewable policy
and renew it for 14 years in a row. You should compare the total 15-year
cost of the annual renewable policy and the 15-year term policy, making
adjustments for the time and value of money, to determine what the best
value is for you.
Here's
an overview of the different types of term policies available and, most
importantly, a look at what happens when the term is over.
Annual
renewable term insurance
Renewable term insurance
Level premium term insurance
Decreasing term insurance
Convertible term insurance
Annual
renewable term insurance.
With annual renewable term insurance, your policy is automatically renewable
each year up to a specific age limit, often 65, but sometimes older.
Since the chances of your dying increase statistically the older you
get, your premiums go up each year as you renew. However, if you buy
your policy when you are young and unlikely to die, you can obtain substantial
coverage for an inexpensive premium.
Renewable
term insurance.
With renewable term insurance, the insurance company automatically allows you to renew your coverage after the term of the policy is over
(generally 5 to 20 years), even if your health has deteriorated. This
is the same way annual renewable works, but for a longer period of time.
Since a lot can happen to your health in 5 or 20 years, renew ability
can be a valuable feature. But since it involves a greater financial
risk for the insurance company, renewable term coverage generally costs
a bit more than annual renewable policies.
The
conditions associated with renewable term may differ from company to
company. For example, though you are guaranteed the right to renew at
the end of your term, you may or may not be able to renew for the same
amount of coverage or for the same term. Moreover, your premiums will
almost definitely go up upon renewal.
Level
premium term insurance.
Level premium term insurance guarantees your premium will stay the same each year
for the term of your policy, generally 5 to 20 years. Insurance companies
keep your premiums the same by charging you an average of the
premiums they would ordinarily charge you with an annual renewable policy.
As a result, you will probably pay more in the early years and less
in the later years than you would if you had an annual renewable policy.
You will probably also encounter a big increase in premiums at the end
of your term when you apply for a new insurance policy.
The
big advantage of level premium term insurance is that your premiums stay the same throughout
your policy, even as you get older. However, if for some reason you
change policies in the early years - when your level term policy is
most expensive - you will end up paying more than you need to for coverage.
Decreasing
term insurance.
With decreasing term insurance, your cash benefits decrease each year while your
premiums remain level for the duration of the term. Decreasing term
is typically used to cover an item whose costs decrease over time, such
as your home's mortgage. It isn't a wise choice for your general life
insurance needs which, due to the effects of inflation, tend to increase
over time.
Convertible
term insurance.
Convertible term insurance enables you to convert your term insurance into any
of the other types of insurance policies offered by the issuing insurance
company. Convertibility can be an advantage if your insurance needs
change over time, as they are likely to do. And, since it involves greater
risk for the insurance company, it generally costs more than annual
renewable term.
What
Happens When The Term Is Over?
It
all depends on the type of term insurance you have. With renewable term,
you are guaranteed the right to take out another term policy without
the formality of a new application or medical examination. With standard
term, your insurance coverage ceases, and you have to apply again, including
taking a medical examination. With convertible term, you reserve the
right to convert your term policy to another type of policy like Whole
Life Insurance or Universal Life Insurance- or in some cases, another term policy - at
any time during the term of your policy. You should, however, expect
an increase in your premiums with your new policy.
Accidental
Death Insurance
A
special limited type of term insurance
Accidental
death insurance pays out a cash benefit if you die in an accident. Since
the sudden loss of a loved one can impose extreme hardship on a family,
this coverage can be thought of as "catastrophic protection."
It can also be thought of as "inexpensive term" since it only
pays benefits for death resulting from accidents and, therefore, often
costs less than other types of term insurance.
The
best way to protect your family is with a life insurance policy that
pays benefits if you die from any cause. But if you don't feel
you can afford regular term life insurance, you should at least give your
family the protection of a good, inexpensive Accidental Death policy.
Summary: Advantages Of Term
Life Insurance: WHAT IT DOES
- It
pays a death benefit to the beneficiary you name.
- It will cover
your final expenses and provide a lump sum for your dependents.
- It covers you for the full amount of life insurance you choose.
- It can be convertible and renewable depending on the policy.
- It gradually increases annual premium as you get older.
- It traditionally works well to meet temporary insurance needs.
Disadvantages
of Term
Life Insurance: WHAT IT DOESN'T DO:
- It doesn't provide a cash value account for some later point such
as retirement.
- It doesn't provide you permanent life insurance protection.
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