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.
