Out of all the various life insurance products available, Term life insurance is one of the most popular and best-selling life insurance products in the marketplace. Its popularity is not surprising since term insurance is priced much lower than any of the permanent insurance products like universal life or whole life insurance.
We have found over time that some prospective clients are even skeptical about term life insurance because it’s so much cheaper than other types that have been offered to them and that’s not surprising.
The primary reasons for term life being less expensive are:
- The policyholder is paying only for the cost of life insurance and riders and any policy fees, so there is no cash value account created.
- Term life insurance is temporary which means unless the insured person dies during the policy period (typically 10, 15, 20, 25, or 30-years) no death benefit is paid by the company. Term policies can be renewed at the end of the term but typically for one year at a time and the rates go up dramatically as you get older. Once the rates begin getting seriously higher than the original policy rates, the policyholder generally converts the term policy to a permanent policy or cancels the policy altogether.
- Compared to permanent life insurance like Whole Life or Universal Life, Term policies rarely have to pay a death benefit which means the mortality rate (what insurers use to determine rates) is very, very low.
Different types of Term Life Insurance
Life insurance products, like any other product, generally change over time as consumers’ needs change. Insurance companies have product managers that oversee a company’s different insurance products and are tasked with making certain the products they oversee are profitable.
If interest in a product diminishes over time because consumers no longer recognize the benefit of the product, insurance companies will generally stop offering it because the sales do not support the cost of having it available. Over time, term insurance has changed because the market has changed:
- Level Term Insurance – Level term is and has been the most popular form of term insurance because of low rates and the guarantee of a level premium over the life of the policy. Most of the term policies sold today also include a conversion option which allows the policyholder to convert their term insurance to permanent insurance without having to prove insurability. There are also various optional riders that can be added to a level term policy that can broaden its coverage and add living benefits.
- Decreasing Term Insurance – Although still used today, decreasing term life insurance is commonly sold through finance companies or banks and is used to guarantee a loan is paid off if the borrower dies before the end of the term of the loan. When the policy is issued, the death benefit is equal to the amount of the loan but then decreases each month as payments on the loan decrease the balance of the loan. The issue with this product is that the cost of the insurance does not go down as the death benefit is reduced. As a result, most borrowers forgo credit life insurance.
- Annual Renewable Term – Annual renewable term is a form of term insurance that provides a death benefit for the insured for a period of 12 months and then the opportunity to renew the coverage for an additional 12 months with the rate based on the new age of the insured. This type of insurance is generally offered by insurance companies when a level term policy is expiring. Consumers also choose this type of insurance when they want to cover a short-term financial commitment.
- Increasing Term Insurance – Increasing term provides a death benefit that increases each year during the term of the policy. Concurrently, as the death benefit increases, so will the monthly premium. This product is rarely used anymore as a stand-alone policy, but as a rider on a permanent life insurance policy.
When Term Life Insurance is the Best Solution
Since term life insurance provides temporary insurance coverage, the best reason to purchase it is to cover debt or replace a breadwinner’s income temporarily. More specifically, term insurance can offer very affordable financial protection for growing families who typically accumulate substantial debt.Here are the most common reasons our clients insist on term life insurance:
Calculating Your Life Insurance Needs
Determining the proper amount of insurance to purchase is important. There are new methods that insurance companies and insurance professionals recommend for determining the amount of insurance you should purchase.
The most popular method is known as a “needs analysis” which is a calculation of current financial needs and future financial needs. The easiest way to conduct your insurance needs analysis is by using an online program that contains the interview questions needed to come up with a legitimate amount of life insurance for your personal circumstances.
Optional Riders to Customize Your Policy
There are a handful of option insurance riders that most insurers offer that will allow you to broaden your coverage or add living benefits to meet your needs and the needs of your surviving loved ones.
Here are the most popular riders that are available for term insurance depending on the insurance company your select:
|Accelerated Death Benefit||This rider provides for the insurer to advance a portion of the death benefit to the insured if he or she is diagnosed with a chronic, critical, or terminal illness.|
|Accidental Death Benefit||With the ADB rider, the insured’s death benefit will be increased according to the benefit selected if the insured’s death is the result of accidental causes.|
|Waiver of Premium||The waiver of premium rider provides for the insurer to waive policy premiums if the insured becomes disabled and unable to work.|
|Children’s Term Rider||This rider allows the insured to add all dependent children in the household to the policy with a death benefit amount that covers each child equally. All future childbirths and adopted children are covered also.|
|Return of Premium||The return of premium rider provides for the insurance company to refund all premiums paid to the insurance company if the insured outlives the term of the policy.|
The Bottom Line
Term is simple. You pay a premium for a period of time (the term) from one to thirty years and if you die during that time the insurance is paid to the person or persons you designate to receive it – called the beneficiary or beneficiaries.
Term life insurance usually has the lowest premium in the early years, making it the most affordable life insurance – initially. Term does not build cash value.
It covers you for a specified period of time (usually from 1 to 30 years, you choose). If you purchase a $1,000,000 term life insurance policy for 20-year period and you die in any of those 20 years, your beneficiary receives the million dollars.
If you are still living at the end of the term, your insurance policy is over unless you can renew the policy. When you renew (assuming your policy has that feature) it will renew at a higher price reflecting your now older age. Term insurance has no buildup of cash as with whole life insurance. Some term life insurance policies do offer a return of premium. See section on Return of Premium
We are committed to making it as easy and convenient as possible for you to purchase quality, low-cost term life insurance for you and your family and to helping you make intelligent choices regarding your insurance choices.
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