Term Life Insurance

A term life insurance policy is the simplest form of life insurance. In return for premium payments, the insurance company promises to pay a benefit if the insured dies during a specified period of coverage. They can be issued for a specific number of years or to a specific age of the insured. A term life policy does not accumulate cash value and the insurance company owes nothing at the end of the term specified in the contract.

As in all insurance products, there are different plans which are designed to benefit the specific needs of the insured. Term life insurance has three basic plans:

• Level term – In the Level Term plan, the amount of insurance protection remains level for the duration of the contract. The premiums will increase at periodic intervals as the policyowner ages but the coverage will remain the same until the policy is terminated or expires. At the end of the contract period, the contract expires and no money changes hands. If the policy is for a specific number of years, the contract will expire at the end of that period. If the insured dies during the term of the contract, his/her beneficiary will be paid the face amount of the contract. Similarly, if the policy is to be in force until the policyowner reaches a certain age, the contract will expire when the insured reaches that age. Again, if the insured dies before reaching that age, the beneficiary will receive the face amount of the contract.

• Decreasing term – In the Decreasing Term plan, the amount of insurance (death benefit protection) will decrease over the term of the contract. A thirty year decreasing term life insurance policy, for example, would have very little value in the 29th year. This type of insurance is often used as “credit life” insurance plan where an insured would like to cover a debt, such as a home mortgage. With a 30 year mortgage, a 30-year decreasing term life insurance policy could be purchased which would assure that if the insured dies during the 30 year mortgage period, the insurance death benefit would be sufficient to pay-off the mortgage.

• Increasing term – In the Increasing Term plan, the amount of insurance will increase at periodic intervals over the term of the contract in accordance with some established indices or some prescribed amount. This type of policy can be used where a young person, for example, cannot presently afford the amount of insurance coverage he/she anticipates will be needed in future years. You might wonder why a person would do this since he/she could simply go out and purchase a new policy when they get the funds. There is at least one very good reason for doing this. The face value is increased without the policyholder having to obtain evidence of insurability. Should the policyowner become disabled, the insurance would still be increased as long as the premium payments are made as scheduled.

Many term life insurance policies contain a couple of options (called “riders”) which can be added to the contract in return for some small increase in the annual premium. These are:

• Renewal Option Rider – if the term of the policy is for a specific period of time or to a specific age, the renewal option allows the policyowner to renew the policy at expiration without having to provide new evidence of insurability. This is a strong advantage to the insured because he/she can continue the insurance coverage even if they have become uninsurable.

• Conversion Option Rider – in this option the insured is allowed to convert the term life insurance contract to a whole life contract at any time during the contract term. Again, the primary advantage of doing this is that the insured can convert without providing evidence of insurability even if he/she has become uninsurable.

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This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contract your insurance agent. Our articles are intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. If you need more information or would like personal advice you should consult an insurance professional. You may also visit your state’s insurance department for more information.