Term Life Insurance
What is Term Life Insurance?
Term Life Insurance is a policy that offers coverage for a certain number of years--whatever is set out in the terms of the contract--usually from 1 to 30 years.
People usually choose this type of policy for the following reasons:
- To provide coverage for dependents
- To provide for expenses at the time of death
- To cover a mortgage or college tuition.
Advantages of Term Life
Term life is appealing because you can choose your own terms of coverage, from length to premiums. It is also recommended by many financial advisors as the best type of policy, because it is a low-cost coverage option that allows you to take the money you save and invest it in other financial interests rather than risk low returns on a whole life policy (this approach is also known by the adage "buy term and invest the difference").
To learn more about the differences between term and whole life insurance, see: Term Life vs. Whole Life Insurance -- What is the Difference?
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Types of Term Life Insurance
For those who decide to purchase term life insurance, there are three main types available, each with their own assets and weaknesses:
- Level Premium Term Insurance: Offers many benefits to buyers. For one, it is one of the most affordable types of coverage, and the rate of the premium remains the same throughout the duration of the policy. In some areas, it also provides you with the chance to increase the amount of your policy every two years in order to keep level with inflation, and is easily payable on an annual, semi-annual, quarterly, or even monthly basis.
- Decreasing Term Insurance: Usually purchased as mortgage protection insurance. In this type of plan, the amount of the benefit decreases over the life of the policy, while the premiums remain the same. For example, a $20,000 policy that is purchased for a term of ten years will decrease by $2,000 each year until it expires, usually corresponding to the decreasing mortgage debt.
- Increasing Premium Insurance: A temporary protection plan that is renewed on an annual basis. As your age increases, so do the premiums, but a benefit of this plan is that there is no need to provide proof of good health. With an increasing premium plan, as long as the premiums are paid, the policy stays in effect. People usually purchase this type of insurance to cover mortgages or loans, or when they have a limited budget but want to be insured, as this type of plan is usually easily converted to a more permanent insurance plan. They may also purchase it as a rider, or supplement, to their existing life insurance policy.
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Drawbacks of a Term Life Policy
The main weakness of a term life policy is that once the term expires, if you choose to renew, you have to undergo another health test, and the premiums will increase with your age. If you have developed a serious health problem, such as heart disease or cancer, it may not be possible to renew the policy, or if it is, only at a substantially higher premium.
This issue may be addressed by selecting a Convertible Term Life Insurance policy from the start. Convertible term insurance is term insurance that the policyowner can exchange for a permanent insurance policy without having to show evidence of insurability at the time of conversion. The conversion period varies anywhere from the first 5 years onward depending on the specifics of the policy you select.
Addressing Your Needs
After weighing the factors, the choice comes down to your personal need for protection. As you age, you may not need the same amount of coverage you did when you were younger, and therefore a term life policy will provide what you need when you need it most. Upon expiration, you can then decide your next step.
What would you like to do next?
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