What Is Term Life Insurance?
Types of Term Life Insurance
- Straight term, also known as level term, insurance is the most popular. This type of term insurance consists of paying the same premium rate for the life of the insurance policy, and the death benefit also remains the same for the life of the policy.
In decreasing term insurance, premiums remain level, but the amount of benefit upon death decreases over time. Term life insurance is intended to provide temporary coverage for one's dependents. Sometimes parents of very young children will purchase decreasing term life insurance. As the children mature and are no longer dependent, the parents have a need for less insurance coverage. The premiums will be slightly less than for a level term policy.
The third type of term insurance is renewable term. Typically the renewal period will be annual. In this form of term life insurance, the death benefit remains constant, but the premiums will increase each year when the policy is renewed. This provides a way to purchase a large amount of insurance at an initially low cost when less income may be available. Presumably as the rates increase, so does the income available to cover the premiums.
A fourth type, return of premium term insurance, has become available in recent years. Under a return of premium policy, at the end of the policy, the purchaser, if still alive, receives a refund of all premiums paid. This type of term life insurance typically costs 25 to 50 percent more than a traditional term life policy, as the insurance company is taking a higher risk that the insured will outlive his policy. The insured does not receive any interest on the premiums paid and, the amount refunded, should the policy be terminated early, is little to none.
Features of Term Life Insurance
- There are features often associated with term life insurance that make it an attractive insurance option for many. Features available with a specific policy will vary from company to company.
One such feature is adjustable premiums. As factors affecting the rates change, the insurance company has the option to raise or lower the premium. Rates, however, can never be higher than the maximum rate stated in the policy.
Term life insurance may not require health examinations, depending upon the amount of coverage elected and/or the age of the insured.
Term life insurance policies may be automatically renewable. When the policy expires, the insured may renew the policy automatically at the rate for the insured's current age.
Most states allow for what is known as convertibility. At any time while the policy is in force, usually up to age 75 for the insured, the term insurance policy may be converted to a permanent insurance policy.
Term Life vs. Whole Life
- Before purchasing any type of insurance, it's important to weigh the benefits against any potential downside. With term life insurance, the benefits include the ability to afford a large amount of coverage at a low rate. It is easy to buy, often not requiring any health examinations, and quotes are readily available via the Internet.
The downside is that term life insurance provides life coverage only and for a fixed period of time. As there is no investment of premiums, the only amount paid is the face value of the death benefit. When the policy term expires, there is no insurance unless the policy is renewed or a new policy is purchased. However, depending upon the insured's age and health at that time, it either may be difficult or very expensive to find a new insurance policy.
The alternative to a term life insurance is some type of whole, or permanent, life insurance policy. With whole life insurance, there is no expiration date and the policy includes a savings plan that builds a cash value over time. This cash value can be accessed via a loan against the policy for anything from a home purchase to retirement funds.
However, because of the built-in savings plan, whole life insurance is expensive and almost always requires the passing of a physical, either to determine insurability or to determine the premium rate.
How Much Term Life Coverage Does One Need?
- There are three schools of thought as to how much coverage one needs to purchase. In the first, the rule-of-thumb approach, individuals are advised to purchase eight to 10 times their annual salary. According to the human life approach, one must consider the proportion of their financial contribution to the overall economic outlook of the household. The most comprehensive approach is the needs approach, in which individuals consider their current financial state as well as future expected financial obligations, such as student loans, mortgages, business debts, funeral expenses, future family financial needs, and so on.
Determining how much term life insurance to purchase, according to Ginger Applegarth of MSN Money, depends on how long one intends to keep the policy. Applegarth advises if the policy is to be held for less than 20 years, term life insurance is the appropriate option, given its high coverage for low rates. For a policy of 10 years or less, little to no cash value would accumulate in a whole life policy, making its expense an unwise investment.
If the policy will be held for 20 years or longer, then, she recommends, whole, or permanent, life insurance as the way to go. The rates are locked in and the policy has no expiration, not to mention the cash value that would build up during that period.
Other Uses for Term Life Insurance
- Although one typically thinks of insuring a person's life and paying out to the family upon the event of that person's death, this isn't the only use for term life insurance. Businesses purchase term insurance to protect their companies against the hardship created by the loss of a key contributor. This is very common with small businesses where the loss of a valuable partner in the business would be devastating.
Businesses also use term insurance to cover outstanding debts, whereby upon the death of a key employee, the insurance proceeds can be utilized to cover any or all remaining debts of the business, and contracts, whereby should a contract fall through, the business is protected against certain losses. A decreasing term policy may be purchase to cover a business loan, the need for insurance decreasing as the loan is repaid.
Diposkan oleh Java Multi Grosir (JMG) Group on Jumat, 08 Juli 2011
Life insurance pays out in the event of one's death. Term life insurance offers an affordable option for many seeking adequate coverage to provide for their loved ones.
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Label: Life Insurance