All You Need to Know About Term Life Insurance
BY: SUMEET MANHAS ON FRIDAY, JULY 06, 2018
In the old days, life insurance used to be very simple; figure out the amount of death benefit you need and then choose either term or whole life insurance. However, over the last couple of years, the insurance industry has become more complicated. In addition to whole life and term life insurance, there are other policies such as variable universal policies, universal policies, variable life, and more. This article offers a full explanation of the term life insurance.
What’s term life insurance?
Also known as pure life insurance, it’s a type of life insurance that guarantees you a payment of death benefits during a particular term. Once the term expires you, the policyholder, can renew for another term, allow the policy to terminate, or even convert to permanent coverage. The term life insurance offers a stated benefit upon the death of the policyholder if death occurs within a specified period.
Note that term life insurance doesn’t have other value than the death benefit. Unlike the whole life insurance, term life insurance policies have no savings component. Its sole purpose is to offer the policyholders insurance against the loss of life. This is the reason term life premiums are significantly lower than the whole life insurance premiums.
The term life insurance premiums are set by your preferred insurer and are determined based on your age, general health condition, and life expectancy. If you die within the specified policy term, the insurance service provider will pay the face value of your policy. If the policy term expires before you die, there is no payout. You’re allowed to renew the policy term, but the insurer will recalculate the new premiums based on your new age and other factors.
In most cases, premiums are flat for the period of the contracted term. But the overall cost of insurance is likely to increase as your life expectancy increases. Upon renewal, you’re likely to realize a significant increase in the premiums. Other factors that impact premiums include the financial state of the insurance company, interest rates, and the state regulations.
Types of term life insurance
Level premium or level term policies offer coverage for a particular period ranging from ten to thirty years. Both premiums and death benefit are fixed. Since actuaries should account for the increase in the cost of insurance over the life of your policy’s effectiveness, the premiums are slightly higher than annually renewable term life insurance.
On the other hand, yearly renewable term life insurance policies have no specified term. You can renew the policy yearly without requiring evidence of insurability every year. Initial premiums are low, but the value will increase as you age. Though there is no specified term, the policy’s premiums can become expensive with time, making this policy unattractive to most people.
Lastly, decreasing term policies are associated with a death benefit that reduces each year in accordance with a predetermined schedule. You will be required to pay a fixed amount of premiums over the entire policy term. In most cases, this policy is often used in concert with a mortgage. This matches the coverage with the decreasing amount of home loan principal.
Who benefits from term life insurance?
This type of insurance is attractive for young couples with kids. The parents can acquire large amounts of coverage for low costs. When the parents die, the significant death benefit can replace the lost income.
It’s advisable to always offer correct information to the insurance service provider. While the details about your skydiving obsession and health may increase your premiums, incorrect information could nullify various aspects of your term life insurance policy.
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