What Is Term Life Insurance?
Term life insurance guarantees payment, of a stated death benefit, during a specified term, to a beneficiary. Term is often referred to as pure life insurance. When the stated term expires, the policyholder, can either renew it for another term, convert the policy to permanent coverage, or allow the policy to lapse or terminate.
How Does Term Life Insurance Work?
Premiums are based off a person’s age, health, and life expectancy. Guidelines are set by individua linsurance companies. The purpose of the policy is to provide financial support (death benefit), to an individual's beneficiary, in the unlikely event of loss of life. As long as that loss of life occurs during the specified time frame as stated in the policy. The death benefit may be used by beneficiaries to pay for the policyholder's unpaid medical bills and funeral costs, pay off consumer debt such as a mortgage or car note or provide for the policyholder's family financially.
Term life insurance is not used for estate planning or charitable-giving purposes. Should the policy expire before the policyholder's death, there is no payment of benefits. All premiums cover the cost of underwriting insurance. As a result, term life premiums are typically lower than permanent life insurance premiums. For renewable policies, the policyholder can choose to renew the policy at specific times or the policy may automatically renew. This will be defined in the policy. However, premiums will be calculated based off their age at the time of renewal and often increase significantly. Term policies may also lock a premium amount in for a specific time then increase later.
There are many different riders that may be included in a term policy, such as return of premium, waver of premium and children riders. For additional information regarding these riders please contact your agent or read our blog post "What Are Life Insurance Riders?"
Who Should Purchase A Term Life Policy?
Term life insurance is attractive for many situations- we have listed a few of the most common purposes below.
* People with children. Parents may obtain large amounts of coverage for reasonably low costs. Upon the death of a parent, the significant benefit can replace lost income and help the family to maintain the same quality of life
*People with debt. Term life insurance can help pay off a mortgage, car note, medical bills and other types of debt
*To plan for college funding. the Gerber Grow Up Plan is a perfect example of a term life insurance policy designed to help pay for college
*Single income families. In the unlikely event the primary income provider passes a term life insurance policy can temporarily replace the income.
How Are Term Life Premiums Calculated?
An insured's age, gender, and health are the primary factors for calculating a policy's premium. Other common factors are, the driving record, current medications, smoking status, occupation and hobbies such as skydiving or race-car driving. Fully underwritten term policies may require a medical examination.
Depending on the type of term policy, the premiums may remain the same over the length of the policy. Some types of term policies do have premiums that fluctuate and as mentioned before if the insured decides to renew the term, the premiums will increase as they will be based off of their age.
Three Types of Term Life
Term insurance comes in three different types. Talk to your agent to determine which type may be best for you.
1. Level term, or level-premium, policies
These policies provide insurance benefits to a beneficiary for a specified period of time. The time frame can range 10 to 30 years. The death benefit and the premium amount remain the same for the duration of the policy.
2. Yearly Renewable Term Policies
These have no specified term but can be renewed each year without the policyholder having to answer health questions or go to the doctor for a physical exam.These premiums are low at the beginning of the policy, but increase as the insured ages. While there is no specific term, as people age the premiums can become high enough to make this choice unattractive for many.
3. Decreasing term policies
This type of policy has a death benefit decreased each year according to a schedule included in the policy. The premium remains the same, but the death benefit will decrease. These types of policies often work well with mortgages as they can be designed to have the death benefit match the principle mortgage amount.
As always, be sure to talk with a licensed life insurance agent, they can help guide you to the correct policy for you and your family, and answer any questions you may have about your current policy.
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