What is Term in Term Life Insurance?
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Why It's Called "Term"
Term
life insurance is called "term" because it provides
coverage for a specific period or term (most often 1, 5,
10, 15 or 20 years). For this reason, it is also called
"temporary" insurance. If death occurs during the term,
the policy pays cash benefits to the beneficiary.
However, once the term is over, and if the policy is not
renewed, the coverage ceases. If death occurs after
the coverage ceases, no cash benefits are paid out.
Term insurance is the most straightforward type of life
insurance and the easiest to understand. Sometimes it is
called "pure" insurance, since the policy has no
financial investment value and most of your
premium goes to pay for coverage, with only a
small amount used to pay the insurance company's costs.
If you are looking for the maximum amount of coverage
for your dollar, term life insurance will give you the
most "bang for your buck".
Different Terms For Different Needs
All term life insurance policies cover you for a
specific amount of time - the term. The term that's
right for you depends on how old your children are, how
many years before you retire, and other factors. Many
people like to know they're insured until they're ready
to retire, usually at age 65. Many just want to have
insurance until their youngest child graduates from
college, and so they make sure their life insurance
coverage includes money to pay for all of the college
tuition.
Most experts agree that you should carry insurance at
least until your youngest child is 18. So if your child
is 3 now, you would want to carry your insurance for at
least 15 years. But that doesn't mean you have to lock
into a 15-year term - you could instead buy an annual
renewable policy and renew it for 14 years in a row. You
should compare the total 15-year cost of the annual
renewable policy and the 15-year term policy, making
adjustments for the time and value of money, to
determine what the best value is for you.
Here's an overview of the different types of term
policies available and, most importantly, a look at what
happens when the term is over.
Annual renewable term insurance.
With this type of term insurance, your policy is
automatically renewable each year up to a specific age
limit, often 65, but sometimes older. Since the chances
of your dying increase statistically the older you get,
your premiums go up each year as you renew. However, if
you buy your policy when you are young and unlikely to
die, you can obtain substantial coverage for an
inexpensive premium.
Renewable term insurance.
With renewable term insurance, the insurance company
automatically allows you to renew your coverage
after the term of the policy is over (generally 5 to 20
years), even if your health has deteriorated. This is
the same way annual renewable works, but for a longer
period of time. Since a lot can happen to your health in
5 or 20 years, renew ability can be a valuable feature.
But since it involves a greater financial risk for the
insurance company, renewable term coverage generally
costs a bit more than annual renewable policies.
The conditions associated with renewable term may differ
from company to company. For example, though you are
guaranteed the right to renew at the end of your term,
you may or may not be able to renew for the same amount
of coverage or for the same term. Moreover, your
premiums will almost definitely go up upon renewal.
Level premium term insurance. Level
premium term guarantees your premium will stay the same
each year for the term of your policy, generally 5 to 20
years. Insurance companies keep your premiums the same
by charging you an average of the premiums they
would ordinarily charge you with an annual renewable
policy. As a result, you will probably pay more in the
early years and less in the later years than you would
if you had an annual renewable policy. You will probably
also encounter a big increase in premiums at the end of
your term when you apply for a new insurance policy.
The big advantage of level term is that your premiums
stay the same throughout your policy, even as you get
older. However, if for some reason you change policies
in the early years - when your level term policy is most
expensive - you will end up paying more than you need to
for coverage.
Decreasing term insurance. With decreasing
term, your cash benefits decrease each year while your
premiums remain level for the duration of the term.
Decreasing term is typically used to cover an item whose
costs decrease over time, such as your home's mortgage.
It isn't a wise choice for your general life insurance
needs which, due to the effects of inflation, tend to
increase over time.
Convertible term insurance. Convertible
term enables you to convert your term insurance into any
of the other types of insurance policies offered by the
issuing insurance company. Convertibility can be an
advantage if your insurance needs change over time, as
they are likely to do. And, since it involves greater
risk for the insurance company, it generally costs more
than annual renewable term.
What Happens When The Term Is Over?
It all depends on the type of term insurance you have.
With renewable term, you are guaranteed the right to
take out another term policy without the formality of a
new application or medical examination. With standard
term, your insurance coverage ceases, and you have to
apply again, including taking a medical examination.
With convertible term, you reserve the right to convert
your term policy to another type of policy like Whole
Life or Universal Life - or in some cases, another term
policy - at any time during the term of your policy. You
should, however, expect an increase in your premiums
with your new policy.
Accidental Death Insurance
A special limited type of term insurance.
Accidental death term pays out a cash benefit if you die
in an accident. Since the sudden loss of a loved one can
impose extreme hardship on a family, this coverage can
be thought of as "catastrophic protection." It can also
be thought of as "inexpensive term" since it only pays
benefits for death resulting from accidents and,
therefore, often costs less than other types of term
insurance.
The best way to protect your family is with a life
insurance policy that pays benefits if you die from
any cause. But if you don't feel you can afford
regular term insurance, you should at least give your
family the protection of a good, inexpensive Accidental
Death policy.
Summary: Advantages Of
Term Life:
WHAT IT DOES
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It pays a death benefit to the beneficiary you name
that will: 1). cover your final expenses and 2).
provide a lump sum that can be invested to meet the
ongoing needs of your dependents.
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It covers you for the full amount of life insurance
you choose for a specified period of time.
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It can be convertible and renewable depending on the
policy.
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It gradually increases annual premium as you get
older.
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It traditionally works well to meet temporary
insurance needs.
Disadvantages of
Term Life:
WHAT IT DOESNT DO:
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It doesnt provide a cash value account for some later
point such as retirement.
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It doesn't provide you permanent life insurance
protection.
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