Almost everyone is familiar with Term life insurance. But, many people may not be exactly clear on how it works. You might also be surprised to learn that there are several different types of term life insurance which can be used for different purposes. I am going to explain how term life insurance works. I will also show how different type of term policies can help you in a variety of different ways.
What is Term Life Insurance?
Term life insurance is the most basic form of life insurance on the market. There are no “bells and whistles” with this policy because it pays out death benefits only. The period of coverage is known as a “Term” because the coverage is in place for a specific period of time. The time range can be as short as a year and can include periods of time or terms such as 5, 10, 15, 20, 25 or 30 years.
A few companies allow you to choose an age-specific date of age for your term such as age 65. And, there are a couple of companies which allow you to customize your term such as for 19 or 28 years. Keep in mind that all these term length varieties are not available with every company.
The prospective life insurance buyer simply has to decide on how much insurance they need and the term or period they want the insurance to last in place.
The policy remains in force so long as premiums are paid on time. Insurance proceeds are payable to your beneficiary(s) and are generally payable tax-free and providing you die while the policy is in force.
Choosing the Right Term
It’s important you give careful consideration to the term you need. If your policy ends and you still need life insurance, you will have to reapply. The cost of a policy will increase quite substantially because the cost of life insurance is based on your age.
Term Life Insurance Rates Depend on Age and Health
Also, the rates you pay will be dependent on the current state of your health. Premiums can increase even more dramatically if your health has declined. There is a way to avoid these massive increases in premiums if your policy has a conversion feature/rider which I will explain shortly.
About Medical Exams For Term Life Insurance
Standard term life insurance policies also require that you undergo a medical exam. Term policies can also be found in other types of life insurance policy such as:
- Simplified Issue (more commonly known as No-Medical Life Insurance)
- Guaranteed Issue (mostly sold as permanent policies, but some companies do sell as term policies)
No-Medical term life insurance does not require a medical exam and does ask health questions.
Guaranteed Issue does not require a medical exam and most companies do not ask any health questions. Both No-Medical and Guaranteed Issue term policies are more expensive than a standard term policy which does require a medical exam.
We generally recommend that if are relatively healthy, you are likely going to save money by choosing a term policy which does require a medical exam. However, the cost of no exam term policies continues to come down to the difference in price is negligible between policies with and without an exam.
Types of Term Life Insurance
Let’s look at the varieties of term life insurance and how you can use them for a variety of life insurance scenarios.
The 7 types of term life insurance include:
- Level Term Life Insurance
- Convertible Term Life Insurance
- Decreasing Term Life Insurance
- Increasing Term Life Insurance
- Return of Premium Term Life Insurance
- 1 Year Renewable Term Life Insurance
- Group Term Life Insurance
Level Term Life Insurance
This is the type of term life insurance most commonly known and sold to most Americans. Level term life insurance simply means that your premiums remain level or the same for the entire period of the term you select.
This policy is especially popular for those choosing to buy life insurance for income replacement. One approach you can use to save money is to buy multiple policies and use them for different purposes and lengths of coverage time.
You can also use term to cover both you and your spouse under 1 policy which is known as “Second to Die” or “Survivorship”.
A term policy can also be used for estate purposes, or for business purposes such as a “Buy/Sell” agreement and “Key Man” life insurance. They may also be used for a special needs child.
Many life insurers also offer a variety of life insurance riders. These riders can help you to customize your requirements even further. Riders that can be considered include:
- Waiver of Premium Rider
- Critical Illness Rider
- Disability Income Rider
- Child Protection Rider
- Accidental Death benefit Rider
- Term Conversion Rider
There are others available as well. These riders are bought separately and for an additional premium. Level term policies are very basic policies which can be used in a variety of life insurance needs. We recommend for anyone looking for level term (or for any type of life insurance policy) that they always use an independent life insurance agent.
You can save a lot of time, money and aggravation using an independent life insurance agent. This is because they will perform the comparison shopping for you. They also understand the underwriting guidelines of the dozens of life insurers they use. The additional advantage works for you because they can help you save more money in a variety of ways. This includes your age, family history, smokers, marijuana users, and especially those with a medical condition.
Some companies advertise “renewable” term policies. Although you select a 20-year term, for example, the policy may be renewable every 5 years. This means your premiums increase every 5 years because the cost is based on your age. Be careful you understand the plan being advertised.
Convertible Term Life Insurance
Most, but not all term life insurance policies either come with a conversion feature or allow you to buy a Term Conversion Rider separately. The convertible term life insurance policy allows you to convert your term policy into a “Permanent” life insurance policy without having to undergo a medical exam.
The conversion must be done at certain anniversary dates specified in the term policy contract. The types of permanent life insurance can be either Whole Life or Universal Life depending on what is available through each individual life insurer.
Premiums will be based solely on your age. The advantage here is that if your health has significantly declined, it will have no bearing on your premiums. If you have to renew a policy without a conversion feature, you can end up paying significantly higher premiums or be declined for a policy.
Decreasing Term Life Insurance
This type of policy simply means the face amount of life insurance coverage will decrease by specified amounts and at specified dates. Your premiums remain level or the same for the life of the policy.
The premium cost of these policies is lower than what someone would pay for the same amount of coverage for a Level Term policy. This is because the face coverage amounts are decreasing.
These policies are often sold as “Mortgage” life insurance policies. Many people choose to use these for their mortgage because they plan to reduce the mortgage over time.
This policy may also be good for those who see a diminishing need for any life insurance purpose. However, we advise you to consult an independent agent since it may be less expensive to purchase a level term policy instead of a decreasing term.
Increasing Term Life Insurance
This policy is not offered by many companies. It simply means that both the face amount of coverage and your premiums will increase at specified anniversary dates. Some companies may charge a fixed rate premium for the life of the policy.
Some agents will often use this type of life insurance in combination with a permanent life insurance policy. It may also be a good choice for younger people on a budget who are just starting out and understand they will have a need for higher coverage in the future.
Return of Premium Term Life Insurance
You can consider another type such as a ROP (Return of Premium) term life insurance. You can also buy a ROP as a separate rider for some term policies.
A ROP simply means that you will be repaid all your premiums should you survive to the end of the term. The circumstances on what is repayable can vary from company to company.
These policies are more expensive than equivalent term policies which do not offer this feature.
1 Year Term Renewable Life Insurance
This term policy is in force for a period of 1 year. These policies are renewable each year and the cost of the renewable premium is based solely on your age.
These policies are especially useful for those who take out personal or business loans where the lender requires they be life insured to protect their interests.
Group Term Life Insurance
These policies are generally available through your employer or a variety of business or professional associations. Coverage amounts are generally slightly more expensive than equivalent standard term policies because the risk is spread through a variety of individuals within the plan. Face coverage amounts are generally much lower than what you could buy on your own.
The one main drawback is that these policies are usually not “portable.” This means that if your employment or association membership ends you are no longer eligible for coverage. This coverage can be ideal for anyone who has health issues where a standard policy could be too expensive.
How To Apply For a Term Life Insurance Policy
As you can see term life insurance is more complex and can be more comprehensive than what you originally believed. Again, we always recommend that if you need low-cost life insurance, or have complex life insurance needs, always use an independent life insurance agent. We will help you navigate the life insurance world and save time and money on your purchase.
Spectrum Insurance Group is made up of life insurance agents who are licensed in all 50 states and the District of Columbia. Spectrum Insurance Group has helped 1000’s of consumers purchase life insurance online & over the phone.
All content on this site has been written by life insurance experts & licensed life insurance agents.