Term life insurance is the easiest type of life insurance to
understand. To put it simply, the insured person pays a minimal
premium per thousand dollars of coverage on an annual, semi
annual, quarterly or monthly basis. If he or she dies within the
term of the policy, the life insurance company will pay the
beneficiary the face value of the policy.
**Distinctive Features of Term Life Insurance
To better understand some of the distinctive features of term
life insurance, consider the following points:
First, term life insurance is “pure insurance” because when you
purchase a term insurance policy you are only buying a “death
benefit”. Unlike with other types of “permanent insurance” such
as whole life, universal life, and variable universal life,
there is no additional cash value built up with this kind of
policy. Term insurance only gives you a specific death benefit.
Second, the coverage is for a defined period of time (the
“term”) such as 1 year, 5 years, 10 years, 15 years, and so on.
Once the policy is in force, it only remains in force until the
end of the term — assuming you pay the premiums, of course.
Third, most term insurance policies are renewable at the end of
the term. With what is known as “Level Term Life Insurance”, the
death benefit remains the same throughout the term of the
policy, but since the insured person is getting older, the
premium will gradually increase. As time goes by the cost of a
level term insurance policy may become greater than you are
willing to pay for a simple death benefit. An alternative is the
“Decreasing Term Life Insurance” policy in which the premium
remains the same, but the death benefit goes down as time goes
by.
Fourth, most term policies can be converted to permanent
policies within a specific number of years. If you decide it is
important to retain the insurance coverage, converting may be
something you should plan for. You can anticipate the
accelerating cost of term insurance premiums and convert your
policy before the premiums become prohibitively high. It is true
that in the short term the premium will usually be higher than
if you stayed with the term policy. But over the long term this
difference will decrease because of the rapid acceleration of
the term insurance premium as you get older. A permanent policy
also accumulates cash value which increases the total death
benefit paid to your beneficiary.
**Popular Uses of Term Life Insurance
Term life insurance is most appropriate whenever you want to
protect your beneficiaries from a sudden financial burden as the
result of your death. Here are some of the most common uses of
term life insurance.
Personal Costs Due to Death - When a spouse or family member
dies there will be immediate costs. Many people purchase a
relatively small term life insurance policy to cover these costs.
Mortgage Insurance - Banks and financial institutions often
insist that mortgage holders retain a term life insurance policy
sufficient to pay out their mortgage. Such policies make the
bank the beneficiary of the policy. If the mortgage holder
should happen to die before the mortgage is paid off, the
insurance policy will pay it out. This is also a great benefit
to a spouse whose earning power will likely be decreased due to
the death of his or her partner.
Business Partner Insurance - Term insurance is also used by
business people to cover outstanding loans with their bank, or
to purchase a deceased partner’s shares on death, if they had an
agreement to do so. Most partnerships have an agreement of this
sort, and the policy premiums are paid by the business.
Key Person Insurance - When a company loses key individuals due
to death, this can often result in hardship to the company. Key
person insurance is purchased by the company for any individual
it deems to be “key”. The company itself is made the beneficiary
of the policy. So when a “key” person dies, the company receives
a cash injection to handle the problems associated with
replacing that person.
**Getting a Term Life Insurance Quote
Here are some things to look for when getting a quote for term
life insurance:
1. The cheapest rate today will not be the cheapest rate
tomorrow. For instance, the cheapest premium today will likely
be for a Yearly Renewable Term policy. This policy is renewed
every year at which time your premium is also adjusted upwards.
This is fine if you intend to convert to a longer term solution
(permanent insurance) in a year or two, or if you have a very
short term requirement for insurance. But if you think you will
need this insurance for a longer period, you would be better to
commit to something like a Ten Year Term Policy. This locks your
premium and death benefit in for ten years. Your rates will not
increase until you renew.
2. Compare coverage and premium projections for different
policies. Think about the long term and get the coverage that
saves you money in the long run.
3. Make sure you completely understand the conversion options
built into the different policies you are considering. Most
policies will let you convert part or all of your term insurance
into permanent insurance within a specific period of time, and
without the need of a medical examination.
4. For some situations you should consider options such as
Decreasing Term Life Insurance in which the death benefit
decreases as time goes by. This makes sense if the policy is
being used to cover a mortgage or business loan.
Term life insurance is not the answer to all life insurance
requirements, but it should be part of a sound plan for every
person’s financial future.
