Insurance

What is term insurance?

Term insurance is a life insurance policy that provides coverage for a certain period or a specified “term” of years. A death benefit will be paid if the insured dies within the period specified in the policy and the policy is in force or in effect.

Term insurance is initially much cheaper than permanent life insurance. Unlike most types of permanent insurance, term insurance has no cash value. In other words, the only value is the guaranteed death benefit of the policy.

Learn about term insurance

There are many types of term insurance policies to choose from. Many policies offer a level premium over the policy term, such as 10, 20 or 30 years. These are often referred to as “level deadline” strategies. A premium is a specific cost, usually monthly, that insurance companies charge policyholders to provide benefits that come with an insurance policy.

Insurance companies calculate premiums based on an individual’s health, age and life expectancy. Depending on the policy chosen, a physical exam may be required to review the person’s health and family medical history.

Premiums are fixed and paid within the term. If the policyholder dies before the policy expires, the insurance company will pay out the face value of the policy. If the term expires and the individual subsequently dies, there will be no coverage or payment. However, policyholders can renew or renew their policy, but the new monthly premium will be based on age and health at the time of renewal. As a result, the premium for a renewed policy may be higher compared to the original term policy initiated when the individual is young.

The range of premiums depends on age and the amount paid. For example, a 30-year policy pays $250,000, ranging from $15 a month for someone in their 20s to less than $60 a month for a 50-year-old. Of course, each insurance company may have different rates based on the policyholder’s health, smoking history and other factors.

key takeaways

  • Term insurance is a life insurance policy that provides coverage for a certain period or a specified “term” of years.
  • The death benefit will be paid if the insured dies within the period specified in the term policy and the policy is in force.
  • Many term policies offer level premiums for the life of the policy.
  • Other term policies offer decreasing or increasing benefits over time, as well as the option to switch from term coverage to permanent coverage.

Types of term insurance

In addition to the horizontal term policies we’ve outlined so far, there are various types of term coverage. Each policy has its advantages and disadvantages, depending on the needs of the policyholder.

Convertible Terms

Convertible term life insurance allows a term insurance policy with a limited number of years before expiration to convert to whole life or permanent coverage. The main benefit of convertible coverage is that the policyholder does not have to undergo a medical examination, nor does it take into account any health conditions when a term policy is converted to permanent coverage.

increase deadline

Some policies allow you to increase your death benefit over time. Premiums also increase, but it allows policyholders to pay lower premiums early on when they have large bills and expenses. The increased term prevents having to qualify for another policy at an older age in order to receive additional benefits, just like traditional term insurance.

Mortgage Term or Decreasing Term

The Mortgage Term or Decreasing Term Policy is the opposite of an increasing term, as the death benefit amount decreases over time. The goal is to match the decline in term benefits with the decline in outstanding mortgages for policyholders. The idea behind this strategy is that if you have less mortgage debt, you don’t need as much life insurance. However, while premiums are lower than term insurance, premium payments remain the same even as benefits drop.

Annual Renewable Energy

Term coverage is renewed as each year passes, but the premium is higher because the policyholder is one year older. The benefit of annual renewable term insurance is that it is guaranteed to be approved each year. However, it may not be the most cost-effective for everyone due to increased costs over time.

Advisor Insights

Steve Kobrin, LUTCF
Steven H. Kobrin Company of LUTCF, Fairlawn, NJ

Term insurance has two features that make it attractive:

  1. Premium and survivor benefit guarantees are provided for a defined number of years based on the company, the age of the insured and other factors.
  2. No ability to accumulate cash within the policy. You cannot pay extra premiums to get extra benefits. You cannot transfer funds from other accounts into the policy. The carrier will not pay dividends or apply interest to your account.

This product is perfect for a single need at a specific time. An example would be indemnifying a mortgage or business loan.

What’s more, if you live longer during this time period and still need coverage, the price of term insurance usually goes up astronomically after the warranty period.

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