Term Life Insurance Guide
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Term insurance is a form of life insurance that offers financial cover, equivalent to the face amount of the policy, to the family of a policyholder in case the latter dies during the policy period. The period of this policy, which is also called term assurance, is limited and can range from one year to 30 years. Term life insurance is a pure form of insurance, which means it does not have a cash component. So, if a policyholder dies even a day after the completion of the policy term, his/her family members will not be entitled to any policy benefits.
Term insurance is a form of life insurance that offers financial cover, equivalent to the face amount of the policy, to the family of a policyholder in case the latter dies during the policy period. The period of this policy, which is also called term assurance, is limited and can range from one year to 30 years. Term life insurance is a pure form of insurance, which means it does not have a cash component. So, if a policyholder dies even a day after the completion of the policy term, his/her family members will not be entitled to any policy benefits.
Table of Contents
Features of Term Life Insurance
Term life insurance is the simplest form of life insurance. Some of its basic features are:
- Low premiums: The premium associated with this policy is the lowest, and hence most affordable, as compared to other life insurance policies.
- Policy can be renewed: After the end of the term of this policy, a policyholder may opt to renew it for a specific period.
- Premiums are not fixed: Every time a term life policy is renewed, the insurance company is sure to raise the premium of the policy. Moreover, a company can revise the premiums of this policy, based on certain factors.
Types of Term Insurance
The premium of term insurance is dependent on several factors, the term of the policy being one of them. The term of the policy is also a defining factor in distinguishing the various types of term life insurance:
Straight Term: The insurance premiums and benefits remain constant throughout the term of the policy.
Renewable Term: Can be renewed every time the coverage period lapses, irrespective of the status of the person’s health. In this policy, one can opt for annual renewable term, wherein the policy is taken for a year and is renewed annually for a total term ranging from 10 to 30 years.
Level Term: Ensures a fixed premium until the end of the policy period, which can range from five years to 30 years.
Decreasing Term: The amount for which you are insured falls over the course of the term of the policy. The premium, however, remains constant. This term policy is used when one needs to protect mortgage or income.
Convertible Term: Can be converted from a term policy into a permanent one.
Adjustable Premium: Allows insurance companies to offer lower premiums using less conservative estimates of mortality and administrative and interest costs.
[break]Term Insurance Premium
Term insurance premium is that amount of the policy which is paid at regular intervals. As term insurance is a temporary insurance, so every year, one needs to pay the premium to cover the risk of death during that year. Term insurance has no cash value, so, in the event of death, the death benefit is to be collected by the beneficiary.
The rule
Each year, the term insurance premium climbs up, as day by day the risk of death increases. Although this coverage can again be accessed by Annual Renewable Term (ART), which is a term life insurance policy where one can renew his policy.
Premium term
Term insurance companies normally offer various levels of premium terms. Premiums are usually planned to remain level for a period of 5, 10, 15, 20, 25 or even 30 years. All these premiums types are comparatively less expensive in nature. Most of the term level premium policies requires a guarantee of level premiums.
Most level term insurance premiums comprise a renewal option and permit the insured to renew for a maximum guaranteed rate.
- Annual renewable term insurance
Annual renewable term insurance policy can be a beneficial option, for those who want to maintain a tight budget and at the same time want to save their immediate relatives in the event of an emergency or crisis. Normally this policy is of two types. Fixed and renewable. Fixed premiums are those, which remains same during the coverage period. Renewable premiums are periodically adjusted based on certain conditions as laid by the company. But normally, the annual renewable term insurance policies automatically are renewed on an yearly basis. The cost of the premium gradually rise, as one becomes older. This is because chances of dying increases as one becomes older.
In comparison to other permanent type policies, this is a less expensive policy, if purchased for a short period. Normally people opt for this policy for temporary use.
- Renewable term insurance policy
Renewable term insurance policy allows the policy to be renewed for another term period. The policy will automatically be renewed for another term period upto a maximum age limit, if the premium are paid at a regular interval. The premiums are comparatively cheaper. Although the premium rates slightly differ from company to company.
- Convertible term life insurance policy
With this policy, one can convert their term insurance into other policy types as offered by other providers. It can be a rational choice, if someone bears children, mortgage, or undertakes any substantial expense.
- Term Life Insurance with Return of Premium (ROP)
Term life insurance with return of premium (ROP) is a product that blends the benefits of traditional term life insurance with a return of premium feature. At the end of the period, full payment of premium will be returned. Generally, during the level premium period, the term insurance company invest the portions of the premium for capital growth. For this reason, it makes possible to return the premium value at the end of the level premium period. But if the insured dies during the coverage period, the death benefit will be paid as with traditional term life insurance, i.e., without a return of premium. If the insured lasts beyond the term period, then no death benefit will be given. Normally, no cash values or loan values are given for term life insurance. Although some return of premium products permit for loan on a certain percentage.
- Decreasing term insurance premium
In this case, the amount against death benefit protection coverage, will decrease over time. The premiums for any decreasing term policy normally remain same throughout the term period.
A comparison
The premiums for any permanent insurance are normally higher than other term insurance policies. Term insurance basically provides protection only for a limited period of time and normally does not make any cash value.
Return of Premium feature
A Return of Premium feature normally refunds all or some of the premium one paid for the term insurance at the end of the term period or at end of the term coverage period, provided no death benefit is paid during that period. The characteristics of the return of premium feature sometimes vary depending on the term life insurance policy one purchases.
Premium mode
Almost every company offers a variety of premium modes like annual, semi-annual, quarterly or monthly. But before choosing any of the above, one should always keep in mind that if one decides to pay an annual premium and then settle to terminate the policy before the term ends, then the insurer does not need to refund any portion of the premium he already paid.
Term Life Insurance Policy
Term life insurance policy is an easily understandable scheme, and is made to provide temporary life insurance protection at a less expensive rate. People usually choose this option to meet their short term goals like paying off a loan or getting extra protection during younger ages.
The periods of term life insurance coverage may slightly differ according to different states, but at length, term life insurance policy provides level premiums for 5,10,20 and 30 year periods. Although one can renew or continue his policy at higher premiums rates. Term life insurance policy premiums are basically much cheaper than cash-value policies (universal and whole), particularly when one is young and in good health.
# Some principal features of term life insurance policy: Accessibility
Most term life insurance policies provide adjustable premiums, means premium rate may rise or fall based on certain conditions. But usually premiums do not cross the maximum premium limit as declared in the policy.
# Easy renewal facility
One can renew his policy according to his needs, but each time one renews, the premium cost will increase according to his present age. This right is usually offered for a certain period of time and varies according to the type of the policy.
# Conversion
One can exchange a term life insurance policy with any permanent life insurance policy offered by the agency at any time (when the policy is in effect) he needs.
As term life insurance policy provides a pure death benefit, its basic use is to cover financial obligations of the insured. Such obligations may comprise of but are not limited to consumer debt, dependent care, college education for dependents, and mortgages.
Claim benefit
If the the insured person dies during his coverage period (usually one, five or ten yrs.), the death benefit is normally given to the beneficiaries. Although the death benefit varies according to the level (increasing or decreasing) of term life insurance policy.
Term life insurance policy does not actually make cash-value or tax benefits like universal or whole life policy, but it can be a beneficial option for someone who needs life insurance, but is not financially capable of giving higher premiums.
Advise by experts
While dealing with customers of term life insurance policy, normally the agents do not get any major commission, what he generally gets while dealing with any cash-value policy. For this reason, the user should always be very cautious to know everything regarding the terms and conditions of any policy coverage.
Terms and conditions
Depending on different age groups of the customer, the term of any term life insurance policy can be subdivided into five parts. These are:
# Annual renewable term insurance policy
# Renewable term insurance policy
# Level premium term insurance policy
# Convertible term insurance policy
# Decreasing term insurance policy
# Annual renewable term insurance policy
This sort of policy is mostly beneficial for themselves who needs to tighten their budget and want to secure their dependents at the time of any misfortunes or serious accident like death. Annual renewable term insurance policies can be of several types. Some have a fixed premium rate for a given period of time and others are renewable in nature. Renewable in nature means, the premiums are periodically adjusted based on certain criteria as laid by the company. But normally, the annual renewable term insurance policies automatically renewed on yearly basis and as the age goes up, the cost of premium gradually climb up. Because the chances of dying increases statistically, as one becomes older and the premiums also rise up each year accordingly. But in comparison to other permanent policies, it is a less expensive policy, if purchased for a short term and used for temporary purpose.
# Renewable term insurance policy:
The term life insurance policy which can be renewed, based on the term of the policy, is termed as renewable term life insurance policy. They are comparatively less expensive. Like other permanent policies, these renewable term life insurance policies do not make any equity.
After the stipulated term ends, one can renew his term of policy with this renewable term insurance. This works almost the same way as of any annual renewable insurance policy but for a longer period of time. Normally it involves a greater financial risk for the insurance company, that is why renewable term life insurance policy charge a bit more than any annual renewable policies. Although the terms and conditions differ from company to company.
# Level premium term insurance policy:
This is another type of term life insurance policy for which the premiums remain the same throughout the term period. During the initial period of the policy, one normally has to pay higher amount of premium. The premium tends to be lower towards the end of its life.
This policy is termed as term life insurance, because it provides coverage only for a limited period of time. So, while opting for level premium term insurance policy, one should seriously look at the length of coverage according to his needs. Sometimes the company sets a new premium level, which needs to be paid during the rest of the policy’s life. The insurance companies usually try to maintain the cost of premiums in the same rate, by charging an average of the premiums. So, the major benefit of this particular policy type is that the premium remains the same throughout the coverage period.
But if one decides to change his policy in the initial period, he may incur loss by paying more, as during the initial periods, the level term remains most expensive in nature.
# Convertible life insurance policy:
People normally opt for convertible term insurance policy to convert the existing term insurance policy into some other types of insurance policies. It is basically beneficial to them who bear children, mortgage, or other substantial expenses. To meet his temporary needs, one normally opts for this convertible term life insurance policy.
# Decreasing term insurance policy:
Decreasing term insurance policy is particularly used to cover items of decreasing cost with respect to time, such as home mortgage. With decreasing term insurance policy, the cash benefits generally decrease each year and the premiums remain level for rest of the term. During the policy period, if the insured person dies, the pre-assigned financial institution will get the assigned amount. In this case, the amount of the sum assured normally cover the amount of the provided loan or mortgage.
Effects on termination of the term
The ending time of any term life insurance policy depends on the type of insurance policy. With renewable term, one can go for another term policy without going through new application or medical examination. While with standard term, the insurance coverage stops, and one has to apply again, including going through medical examination. With the convertible term, one normally holds back the right to convert his term policy to another type of policy.
The Benefits of Term Life Insurance
Some of the advantages of buying term life insurance are:
It is not very expensive, in comparison to whole life insurance policies. For example, a life insurance policy can cost thousands of dollars a year, whereas the term life insurance policy costs mere hundred dollars a year. Not only this, term life insurance policy is easier to conceptualize and one only needs to pay a low monthly premium depending upon the term length and amount of coverage he chooses.
Term life insurance can be a good option for short term needs.
Tips by experts
# One can buy many term life insurance policies according to his needs, as it is more or less affordable.
# While going for a particular type of policy, one should always be careful enough to verify the terms of the policy to make it clear that his dependents, including his spouse are covered according to his needs in the policy.
# The best time to choose any term life insurance policy is when any body is having a very good health condition.
Portability or accessibility
Term life insurance policy can change its nature over time, although normally the premiums do not raise above a standard limit as defined in the policy.
Term Life Insurance with Return of Premium (ROP)
This is one particular form of term life insurance policy with Return of Premium (ROP), which provides a partial or complete return of full premium value, if the insured person becomes alive up to the end of the term period. But if the insured person dies before the stipulated term period, the death benefit will be given without any return of premium.
No exam. Protection
If one opts for any term life insurance policy, he does not require to sit for any exam., where various health related questions are asked to answer. Since term life insurance policy has no exam protection scheme. This no exam. coverage is normally provided for a period of 10,15, 20, or 30 yrs., depending upon the applicant’s age, health and amount. The premiums for “term life insurance no exam policies” are higher than premiums for any guaranteed term life insurance policy.
[break]Whole Term Life Insurance
Whole term life insurance is a type of life insurance plan, which covers the insured person, throughout his life, with a condition that the premium is being paid at a regular interval. Whole term life insurance is beneficial for any long-term responsibility, like estate liquidity, death taxes,etc. It is also a very good option for the safety of family and asset.
Advise by Experts
Before opting for the Whole Term Life Insurance , one needs to think analytically to determine his current and future needs, so that this policy can be used in an optimum way. As the rates and coverage of policies vary from state to state and company to company, one should first talk to any experienced agent to determine the best policy coverage option for himself.
Payment procedure
Whole term life insurance, refers to a policy that pays on death or, in some cases, on critical illness, according to some predefined guidelines and rules. The payment procedure of premium level can be categorized as single, fixed period, or changeable.
Major advantages
# One major advantage of this whole term life insurance policy is that the person is guaranteed for life and are not restrained from future cover if they ever have a serious illness like cancer.
# A whole term life insurance policy provides a basic death benefit and also builds up a “cash value”, which one can use as his savings, so that he can withdraw or borrow when he needs.
# When one pays his premium in a whole term life insurance policy, a certain portion of the money is used to buy the policy’s death benefit and some portion goes into the cash value account. The policy also pays dividends, by which the cash value grows as years pass by.
The cash value
Cash value is the amount of money that one is agreed to receive in the event of policy cancellation. Premium is like an investment, as it’s value climb up based on certain condition as like any investment. Although the rate of return varies from company to company.
Whole vs. term life insurance
# There are some variations on whole and term life policies. So, while thinking for any life insurance policy, one should contact any financial experts and act accordingly. Because between the two, term life insurance policy insures for a specific number of years, or a term, and is generally less costly whereas a whole term life insurance policy insure permanently, i.e., throughout the entire life and generally cost more.
# Whole term life insurance survives for life time and provides a permanent protection for the family. Whereas the term life insurance covers for any loss of life for a specific term, usually for one to 20 years and unlike whole term life insurance, it does not accrue any cash value. In the event if one’s financial position changes and eventually he becomes able to pay higher premium rates, he can convert the term policy to a whole term life insurance policy, that makes value throughout his life.
# The other prime difference between a whole term life insurance policy and the term life insurance policy is that the premium in a whole life policy distinctively remains constant, while term life premiums normally climb up over time.
Some types of whole term life insurance policies:
Some traditional types of whole term life insurance policies are:
# Non-participating
# Participating
# Indeterminate premium
# Economic
# Limited pay
# Single premium
Non-participating
All the policy related values do not change after the issue. The companies generally anticipate about all the future risks and estimations. In case the future claims are underestimated, the insurance company makes up for the difference.
Participating
In case of participating policy, the insurance company contributes the excess profits (dividends in the USA, bonus in the Commonwealth) with the insured person. The more the profit of the company, the more one will get the dividend.
Indeterminate premium It is similar to non-participating type of whole term life insurance policy, except that the premium may vary year to year. However, the premium normally does not exceed the maximum limit of the premium assured in the policy.
Limited pay
It is almost the similar type as of the participating policy. But here the annual premium amount can only be paid for a certain number of years like 20 yrs.
Single premium
This type of whole term life insurance policy comprises large surrender fees during early policy years.
Last but not the least
Opting for a whole term life insurance policy can be a rational decision if one wants to protect his family financially, as it can be a great savings for him. So, one needs to collect several whole term life insurance quotes to analytically pick the right one, that suits him best.
