Term Life Insurance
Term life insurance provides protection for a specified period of time, typically from one to 30 years. It pays a death benefit only if you die during this term.
So technically, if you own term life insurance, you are renting your insurance and betting that during the “term” you will die, but the insurance company is betting you won’t.
Can you guess who usually wins the bet?
The insurance company of course! – at least most of the time.
Insurance industry statistics show that less than 3% of term life policies ever pay a claim. So this means the insurance company has carefully done their “homework” on you to make sure you will live out your term.
With that being said, there is nothing wrong with buying term insurance. In fact most people to buy term insurance because it provides the highest amount of coverage at the lowest cost.
More Americans own term insurance than they own whole life insurance – because it’s affordable. The term in term insurance means you are covered for a specified period of years; say 10 or 20 years (20 is the most common). If you should die before your term period ends, the insurance company will pay a death benefit. If you live and your term ends, there is no more coverage.
Some policies can be renewed at the end of the term or some can be converted to permanent insurance without need for a medical exam.
There are several different types of term insurance you can consider:
Renewable Term Insurance.
These policies have a provision allowing you to renew coverage at the end of the term without having to show evidence of insurability. The company has to renew your policy even if your medical condition has deteriorated. However, the premium rate will rise each year as you get older.
Why would you buy Renewable Term Life? Premiums are based on your age so if you are young this type of policy is really cheap. However, as you get older, the premiums go up each year based on your new age. Eventually, when you reach age 60 or above, the premiums are not affordable for most people and they cancel their policies.
Convertible Term Insurance.
These policies allow you to convert your term coverage into a permanent policy (i.e.: whole life or Universal life) without providing evidence of insurability. Premiums for convertible policies are usually higher than for nonconvertible policies. Once converted, the premiums for the permanent coverage will be higher than those of the term policy with the same amount of death benefit. However, the permanent policy premiums will never go up and the policy will remain with you the rest of your life.
Why would you buy Convertible Term Life? You will pay slightly more for your privileged to convert your term policy to a permanent policy. But since we can’t predict the future and our need for life insurance, convertible term allows you to convert and have a life insurance policy for the rest of your life should you need it.
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 death benefit is the amount the life insurance company will pay, as stated in the policy, when the insured person dies. The advantage is that you lock in a certain rate for the period of the policy. The disadvantage is that the premiums will tend to cost more than the earlier years of a renewable policy.
Why would you buy level term insurance? Predictable premiums
Decreasing Term Insurance (Mortgage 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 decreases by $10,000 each year for 10 years. The premium usually remains the same over the term of the policy. This type of insurance allows you to pay the same premium for less insurance over time.
Why would you buy Decreasing Term? You wouldn’t. Your bank will probably convince you that you need insurance to cover your mortgage so your spouse won’t have to go it alone, should you die. Decreasing Term is a waste of money and an old trick used by banks to get more money from you. Buy a level term policy for the length of your mortgage.