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Term Life Insurance Defined
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Term life insurance is the simplest form of life insurance. Term life insurance provides
protection for a specific period of time. It pays a benefit only if you
die during the term. If you live beyond the specified term, the policy expires
without value. It is sometimes called temporary life insurance.
Policies generally last for 5, 10, 15, 20 or 30 years.
Some term life insurance policies can be renewed when you reach the end of the term. The premium
rates increase at each renewal date. Many policies require that you present
evidence of insurability at renewal to qualify for lower rates.
Some policies are convertible. They guarantee the right to switch or "convert"
to one of the company's permanent
life policies. Conversion rights usually guarantee that you will be
accepted for the permanent life policy regardless of your health when you
convert.
Term Life Insurance Advantages
- Initial premiums generally are lower than those for permanent insurance,
allowing you to buy higher levels of coverage at a younger age when
the need for protection often is greatest.
- It's good for covering needs that will disappear in time, such as
mortgages or car loans.
Term Life Insurance Disadvantages
- Premiums increase as you grow older.
- Coverage may terminate at the end of the term or become too expensive
to continue.
- The policy generally doesn't offer cash
value or paid-up insurance.
Types of Term Life Insurance
There are three major types of term life insurance.
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Level
Level term life insurance provides a death benefit that stays the same
over the period. For example, a 5-year level policy with $10,000 in
coverage means the company will pay $10,000 if you die any time during
the 5 years the policy is in effect. Premiums normally stay the same
("level") during the term.
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Decreasing
Decreasing term life insurance provides a death benefit that decreases
over the life of the policy in a specified manner. For example, the
benefit during the first year of a 5-year decreasing term policy may
be $10,000, and decrease by $2,000 every year. At the end of the fifth
year, the face value is zero and coverage expires. Premiums for decreasing
term usually remain level.
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Increasing
Increasing term life insurance provides a death benefit that increases
over the term in a specified manner. For example, the benefit for a
5-year increasing term policy may have a face amount that starts at
$10,000 and then increases 5% every policy anniversary date. Or the
coverage may be tied to increases in the cost of living as measured
by a standard index. Premiums usually increase with the coverage in
this type of policy.
Tip: Insurance agents sometimes recommend that you switch term companies
every couple of years to take advantage of the company's promotional rates
in the first couple of years. This involves the risk that you would be subject
to a new contestability period. You start a new contestability period anytime
you switch. It is generally two years. If you die during this period, the
insurance company can (and probably will) investigate the statements you
made on your application. If you've given inaccurate or incomplete answers,
the company may (and probably will) refuse to pay the death benefit.
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