When it comes time to talk about life insurance, the word itself may shy people away from it. There are so many different types of terms to know and policies to understand. But because this is such a significant decision to make during your life, you’ll want to know everything you can about life insurance.
So here is some helpful information on one of the most popular types of life insurance policies – term insurance. From the basics to the add-ons, we gathered everything you need to know to understand the basics of term life insurance.
Basics of Term Life Insurance
The best way to understand term life insurance is looking at it like temporary insurance. Just as the name suggests, these types of policies only provide coverage for a set amount of time. You will often find this insurance plan ranges from 5 to 30 years.
Although that is the significant difference between term life insurance and other policies, that is not the only one. Term policies only provide a death benefit to your beneficiary during the agreed coverage period, nothing more. Once the coverage period ends, there is no remaining value on the plan. At this point, the client must decide on renewing the policy or letting it expire.
Term life insurance is usually the most popular and most affordable type of coverage. This is because your premium payments go directly to the policy, not a cash value like with permanent insurance.
However, when it comes time for renewing, term insurance may not be the cheapest option anymore. When the term expires, you will be older than when you first bought the policy. Since insurers take into consideration your age, health and lifestyle, you more than likely will see an increase in premiums if you renew. This is because you are now a higher risk for the insurance company of having to pay out the death benefit.
Let’s look now at the different types of term insurance: level term, decreasing term and increasing term.
Level Term Insurance
With this type of insurance, you have a set monthly premium payment for the coverage period (usually 10 to 20 years for this type). Your death benefit is also fixed. You may find this kind of coverage is more expensive at the start. However, the premiums do not increase over time as you age, so it ends up balancing out at the end.
Decreasing Term Insurance
This policy has a decreasing death benefit over the coverage period. It decreases at a predetermined rate. Your premium payments tend to stay the same over the length of coverage.
The purpose behind this policy is the older you get, the less likely you need high-level insurance. The type is generally favorable for younger people.
Increasing Term Insurance
If you purchase this type of policy, your death benefit will increase each year. This also means the monthly premiums will increase as well. There may come the point, though, when the premiums rise more rapidly than the death benefit.
Renewable Term
This is a type of clause that is an added option to your term insurance. It allows you to extend your current coverage without having to requalify. Although it will increase your premium payments at the start (to cover the insurers higher risk), it would work out in your benefit later on. You wouldn’t have to reapply for coverage which means not going through medical exams at an older age.
Conversion Privilege
This type of feature allows you to switch your type of insurance (say from term to permanent). The benefit is that you generally do not have to resubmit any medical examination when changing policies.
Although there are many types (and different features) of term life insurance available, it doesn’t have to be confusing. Purchasing life insurance is a big decision. You want to go in making sure you know everything you can about it. So speak with a trusted insurance company before jumping into a life-long decision.
Editor’s note: This post was sponsored by Midland National.