What is Term Life Insurance?
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Term life insurance is simply life insurance with a finite time period of coverage. You purchase a term policy with either 10, 15, 20, 25 or 30-year terms. The premium is level throughout the term and at the end of the term, you have the option to renew the coverage annually up to a certain age (varies by the insurance company). Most term life insurance policies also have an option to convert to a permanent policy (up to a specific age established by each insurance company).
The main benefit of term insurance is the cost. Term life insurance typically has significantly lower premiums than permanent policies because, while a permanent policy’s death benefit is guaranteed for life (no matter how long it is), a term policy will only pay the death benefit if the insured person passes away during the term period.
Unlike permanent policies, term life insurance does not accumulate any cash value. It offers pure insurance coverage and pays a death benefit provided the insured person dies during the policy term. If you outlive the term of your policy, no benefits will be paid and you will not receive the premiums back.
Although term insurance does not provide lifetime (permanent) insurance coverage, there are many features and benefits that have allowed term insurance policies to continue to grow in significant sales and policy count.
Since the mortality rate for policyholders that purchase term life insurance is very low, the insurance companies pay out very few claims compared to permanent insurance, which allows them to provide coverage at much lower rates. This makes term life insurance a much better solution for younger adults who want to make certain that their income can be replaced so that surviving loved ones will have the money needed to pay monthly living expenses, pay off the mortgage and other debts, pay for college tuition, invest in retirement plans, and take care of final expenses like funeral and burial costs.
Life insurance is often viewed as income replacement for a family’s breadwinner, should he/she pass away during his/her working years. Therefore, when purchasing term life insurance, we recommend taking out a policy that insures the breadwinner’s working years. As an example, if you are 35 years old and expect to work until you’re 65, it would be wise to purchase a 30-year term policy.
If you are in good health, purchasing the longest term possible locks in the premiums for the length of the term. If you were to purchase only a 10-year term policy with the idea that you would purchase a new 10-year term policy at the end of the first term, you are at risk of paying much higher rates for the next policy, due to age and change in health status.
The conversion privilege (term conversion) is an option offered by the insurer which allows the policyholder to convert all or a portion of their term policy to a permanent policy like Whole Life or Universal Life insurance without having to go through medical underwriting again. The conversion privilege, if offered by the company, will have a time period listed in the insurance contract that specifies when the policy can be converted.
It’s important to note that not every term policy offers the conversion privilege and that the permanent policies that are offered are subject to change by the insurance company. The conversion privilege is important and can be a lifesaver for an insured who has accumulated some health issues and wants permanent insurance coverage.
Many people think of term life insurance as only a death benefit when in fact there are several riders available that allow the policyholder to broaden their coverage and add living benefits to their policy. Since every insurer does not offer the same riders for their term policies, it’s important to speak with your independent agent to find a solution that works best for you. Here are the most popular riders that are typically available:
The Accelerated Death Benefit (ADB) provides for the life insurance company to advance a portion of the death benefit to the policyholder and not the beneficiary. Each insurance company that offers this benefit sets specific guidelines on when it will be paid and how much will be paid, but most pay this benefit if the insured is diagnosed with a terminal illness that will likely result in death within one or two years.
This rider provides for the insurer to pay an additional death benefit to the beneficiary if the named insured dies as the result of an accident. Most accidental death riders provide for a multiple (usually double) of the death benefit.
The waiver of premium rider provides for the insurance company to waive your periodic premiums if you become totally disabled. This allows the insured to remain covered while unable to pay the premiums because of a disability.
This valuable rider allows an insured to purchase additional life insurance at a later date without having to prove they are insurable (healthy). Although the additional purchase option can only be made at times specified in the policy, this rider allows an applicant who cannot afford the amount of insurance they need at the time of application to purchase more in the future when they can afford it.
The children’s term insurance rider allows the policyholder to add all their natural and adopted children to the insurance policy with a coverage amount specified in the policy. Typically children between the ages of 15 days to 25-years old can be covered as long as they are unmarried. The children’s term rider provides term life insurance at a very low cost to the policyholder.
The return of premium rider provides for the insurance company to return all premiums paid to the insurance company if the insured outlives the term of the insurance policy. The premiums are returned in a lump-sum payment and are not taxable to the policyholder.
There are many misconceptions out there about how much life insurance you should purchase. Simply speaking, life insurance is used to solve a financial problem, so the consumer must first identify the size of their problem. Everyone’s financial circumstances are different so it’s important not to take a cookie-cutter approach to your insurance needs.
The most appropriate method to determine your insurance needs is by using an insurance needs analysis (insurance calculator). There are many free insurance calculators online and most independent agents have one posted on their website. A free calculator that we can recommend can be found at CALXML.com. This is a comprehensive calculator that considers most financial aspects of the individual user.
It’s important to note, however, if you are unable to afford the amount of coverage your circumstances require, you should, at least, purchase as much as you can comfortably afford and then add to that amount when you can afford it.
Consumers are fortunate that in the insurance marketplace today, anyone can go online and get an insurance quote instantly from multiple companies by completing a quick form. Most independent insurance brokers like LifeInsure.com represent many of the highly rated insurance carriers and will also have companies available to handle high-risk cases.
LifeInsure.com is an experienced and reputable insurance brokerage who is willing to provide advice, answer all your questions, and walk you through the underwriting process and the issuance of your insurance policy. Whether you term, whole life, or universal life insurance, LifeInsure.com has experienced professionals that will gladly help you in the process of getting the insurance coverage you need.