Term Insurance Term Insurance

Term life insurance is a tool to help you provide financial peace of mind for yourself and your family. Term insurance provides a sum of money to your beneficiaries if you should meet an unexpected demise.

Like all other types of life insurance, term insurance requires premium payments either in lump sum or over time. In exchange, an insurance company guarantees a certain amount of money will be paid to your family. Term is the least expensive, most simple form of life insurance, providing the most basic type of protection — and this is exactly what many families need.

Term insurance is not a product meant to have many bells and whistles attached. Some of the permanent life insurance policies come with additional investment components and other complex features. Term life, on the other hand, is designed to provide policyholders with affordable life insurance coverage that will pay off their mortgage, the kids’ college, cars and other debt obligations, and provide a supplement to the remaining spouse’s retirement income.

Once large debts are paid off, the kids have left home and retirement plans are fully funded, term insurance is no longer necessary. This concept is commonly called the theory of decreasing responsibility, and explains why term life insurance is structured into 10 to 30-year policy “terms.”

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 with each renewal.

Convertible Term Insurance

These policies allow you to convert your term coverage into a permanent policy 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 death benefit. However, the permanent policy premiums will remain the same while the term premiums will rise.

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 the renewable policy, and when the level policy expires, premium 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 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, rather than have your premium increase for the same amount of insurance.

Increasing Term Insurance

This kind of policy starts at one level of death benefit which gradually increases over the life of the policy. You may start with a $100,000 policy and increase the death benefit $10,000 each year for 10 years. The premium will increase each year. This kind of policy may be appropriate if you see your insurance needs growing in coming years because, for example, you expect to have more children.