Term Insurance is the simplest form of life insurance. It provides financial protection for a specific time, usually from one to 30 years. These policies are relatively inexpensive and are well suited for goals, such as insurance protection during the child-raising years or while paying off a mortgage. They provide a death benefit, but do not offer cash savings.
Purchasing term insurance is like renting a home. It is a short-term solution. Monthly costs are usually lower, but you will not be building equity. Just as many people rent (while saving to buy a home), individuals who need insurance protection now, but have limited resources, may purchase term coverage and then switch to permanent protection. Others may view term insurance as a cost-effective way to protect their family and still have money to put into other investments.
If you need life insurance for a specific period of time, term insurance should be considered. It provides insurance protection from one to 30 years and is generally the least expensive form of life insurance. If you die during the term of the policy, your beneficiary will be paid the amount of money specified in the policy. If you are still alive at the end of the term, coverage stops unless the policy is renewed. Unlike permanent insurance, you will not build equity in the form of cash savings.
Term insurance can be a useful financial tool for:
Those who need a large amount of life insurance, but have a limited budget, such as a young couple, with children.
Covering debts that will disappear in time, such as a mortgage or car loan.
Business owners who want to cover the life of a key employee for a specific number of years.
Keep in mind that premiums are lowest when you are young and increase upon renewal as you age. Some term insurance policies can be renewed when the policy ends, but the premium will generally increase. Many policies require a medical examination at renewal to qualify for the lowest rates. Before deciding on a policy from a specific company, find out what their requirements are. Also, see if you would be able to convert the term policy to a permanent policy later on.
If you think your financial needs will change, you may also want to look into “convertible” term policies. These allow you to convert to permanent insurance without a medical examination in exchange for higher premiums.
Different Types of Term Insurance:
Renewable Term Insurance - This policy allows you to renew coverage at the end of the term without having to submit medical information. The company renews your policy even if your health has deteriorated. However, the premium rate will usually rise with each renewal.
Convertible Term Insurance - You can convert your term coverage into a permanent policy without providing evidence of insurability (usually a medical exam). Premiums for convertible policies are usually higher than for nonconvertible policies. Once converted, the premiums for the permanent coverage will be higher than those you are currently paying for the term policy for the same death benefit. However, the premiums for the permanent policy will now remain the same while the term premiums will continue to rise on renewal.
Level Term Insurance - These policies provide a fixed premium for a certain number of years, usually 10 or 20 years, while the death benefit remains unchanged. The advantage is that you lock in a certain rate for the period of the policy. The disadvantage is that rates will jump considerably if you want to renew with another level policy.
Decreasing Term Insurance - The death benefit in this type of policy decreases over its term. For example, you might start with $100,000 of coverage and the amount of coverage would decrease by $10,000 each year for 10 years. The premium will vary over the term of the policy. This policy is no longer sold very often.
NOTE: Portions of the above information have been graciously provided by The Insurance Information Institute at www.iii.org/individuals