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As you shop for life insurance, you will ultimately end up choosing between two very broad types of coverage: permanent life insurance and term life insurance.
Term coverage is by far the most common type of life insurance policy today because it offers you the protection you need when you most need it (such as while your children are young or you have a mortgage) and it’s more affordable than permanent life insurance. Here’s what you should know about shopping for term coverage.
What is Term Life Insurance?
Term life insurance covers you for a specific number of years — usually 10, 20, or 30 years — while whole life insurance covers you for life as long as you keep up with your premiums. For most people, this is preferable as you have the coverage while you need it most.
A term policy is designed for short-term needs. As an example, you may want a 30-year term policy if you want to ensure your loved ones can pay off a 30-year mortgage if something happens to you.
Most term policies have a maximum age to qualify and you may be required to submit to a health exam. If you keep up with your premiums and die during the policy term, your beneficiaries will receive a death benefit. If you die after the term expires, there will be no death benefit.
Once the term ends, you can typically choose to convert the policy into a permanent policy (if you qualify). Term life insurance policies have no cash value.
Exploring the Different Types of Term Life Insurance
There are several types of term life insurance options to choose from, each designed for different needs. The following are the most common types of term policies you can choose from.
Level Term Life Insurance
While some term life insurance policies have an annual renewal at which point premiums may rise, most term policies are guaranteed level term insurance. This means that your premium is guaranteed to remain the same for the term of your policy, whether it’s 1 year, 10 year, or 30 years.
With level term life insurance, the premium you pay each year will stay the same for the duration of your policy. The longer the term remains level, the higher our premiums because your older (and more expensive to insure) years are considered in the premium.
The majority of level term policies offer a renewal option. This means you can renew your policy for a maximum guaranteed rate if you decide you want a longer term.
You will likely be required to submit to an exam because the renewal itself isn’t guaranteed. You can also likely convert your policy to a whole or universal life insurance policy.
Most life insurance policies offer a specific death benefit, regardless of when the death occurs. With an increasing term policy, the death benefit your beneficiaries receive increases each year you have the policy. As the death benefit goes up, so will your premium.
The death benefit usually increases within a specific limit, usually between 2% and 10%. The increase in the death benefit will correlate with the increase in your premium.
This type of life insurance may not be a good option if you want long-term protection as the rising premiums will at some point reduce the value of the coverage. The premiums may also increase at a higher rate than the death benefit.
A decreasing term life insurance policy is designed to cover specific expenses your loved ones may face, such as a mortgage or loan, where the amount owed decreases each year. Sometimes called mortgage protection insurance, this type of policy has a death benefit that decreases each year. If you die while your policy is in effect, your beneficiaries receive what is left on the policy.
Unlike the increasing term policy, premiums on a decreasing term policy do not change. Instead, you get a much lower premium from the start than you would with a standard level term policy or an increasing term policy because your death benefit will keep getting lower.
This type of policy can help you avoid passing debts onto your loved ones. If your biggest concern for your beneficiaries is paying off the mortgage, this type of policy may be a good fit.
A renewable term policy allows you to extend or renew your policy for an additional term with no medical exam, unlike a standard policy that requires you to pass a medical exam and meet underwriting standards. This type of policy means you can continue your insurance coverage if you find yourself in worse health.
While you may not need to submit to a medical exam, your health will still matter when it’s time to renew. You have the guaranteed right to renew the policy, the premium you pay each year for the same coverage may be higher due to your age and any changes in your health. Your new policy may not be renewable, either.
Some renewable policies automatically renew every year up to a specific age limit (usually 65), although the premiums go up each year as you are statistically more likely to die. Other policies automatically renew when your policy term ends. This second type of policy tends to be more expensive as the insurance company faces more risk.
Make sure you fully understand the terms beforehand on any renewable term life insurance.
A convertible term policy gives you the right to convert your term policy into permanent life insurance of equal value, usually with no medical exam or underwriting standards to meet. As an example, you can convert an $80,000 term policy into an $80,000 cash value whole policy with no medical exam.
There are some guidelines you must meet, however. Converting your policy will likely increase your premiums and you are usually only able to convert the policy before you reach the age of 65. The advantage to a convertible term policy is you can switch to permanent insurance if you find your health is declining, as you may otherwise have trouble qualifying for any type of permanent coverage.
Some insurance companies offer hybrid life insurance that combines a convertible term policy with the option to renew the policy for an additional term. While your age and health will be a factor, this type of policy gives you more options, usually on an annual basis. In exchange for greater flexibility, these hybrid policies usually have higher premiums.
What are my options the end of a life insurance term?
What happens to your insurance coverage when your term ends depends on the type of policy you have. With a standard term policy, your coverage will simply end although you can apply for new coverage and submit to a medical exam.
A renewable term gives you the guaranteed right to renew another term policy without a medical exam. With a convertible term, you can convert your policy to a universal or whole life policy, either at term-end or during the term of your policy.
To choose the right type of term life insurance for your needs, consider the position your loved ones will find themselves in if something happens to you. You may want a longer term policy if your children are young, for example, or a decreasing term if your biggest concern is how your loved ones will pay off debt.
If you prefer the long-term peace of mind, you may prefer a convertible or renewable policy that offers greater flexibility. Just remember that the more options you choose, the higher your premium.
Always remember that premiums can vary widely between companies.
That’s why it’s SO important that you understand how the different carriers might view your personal situation. Shopping around will result in you getting the best life insurance coverage for your needs at an affordable premium.
If you have questions on which type of term life insurance is right for you, please contact our office as we’d be glad to help.