Term
life insurance also known as “temporary insurance” is
designed to provide low cost protection for risk of premature
death and will pay a benefit only if the covered individual
dies within the given term period.
There is no cash value growth with term
life insurance. Therefore, premiums for term are much lower
over the short-run than any other type of life insurance.
Actual costs of term insurance are based on the age, gender,
lifestyle and health of the insured. After the initial
term period, the cost of insurance will increase as the
insured gets older. Over time, due to age increases, policy
costs will eventually become cost prohibitive. Therefore,
term insurance is best used in cases where the insurance
is needed for a limited time.
Two important contractual features of term life insurance
are the renewable provision and
the conversion privilege.
The policy’s renewable provision permits a covered
individual to continue the insurance policy beyond the
initial term period without providing evidence of good
health. The costs beyond the initial term period will
increase but the insurance company cannot cancel the
insurance policy for any reason as long as it is renewable.
Most policies are renewable to age 95.
The conversion privilege is as equally important
and allows a policyholder to “convert” or exchange a term
policy for a whole life or universal life policy without
evidence of insurability. The conversion of a term policy
is done at the insured’s current age and the premiums
to convert to more permanent life insurance will be higher.
The conversion privilege is especially important in situations
where health changes impact an individual’s ability
to get competitively priced insurance or especially when
the individual is uninsurable.
There are several different forms of term life insurance
policies. The types of term life include annual renewable
term (ART), level term, decreasing term, return of premium
(ROP) term, and lifetime guaranteed term insurance. Currently,
the most popular term life policies are level term life,
ROP term and lifetime guaranteed term. For more information
on term insurance see, "What
are the Types of Term Life Insurance?"
Advantages of Term Life:
Premium payments for term insurance are
usually much lower than whole life
Affordability allows
for increased amounts of insurance when it's needed most
Great for covering temporary needs such as notes, mortgages,
etc
Disadvantages of Term Life:
Payments will increase after the initial guarantee (level)
premium period
