Term Life Insurance Basics
We've all seen the TV commercials—term life insurance for just a few dollars a month. While these
advertisements may be based on very favorable situations, the general premise is true. Term life insurance
is the simplest and most inexpensive form of life insurance. And it can provide the peace of mind that comes
from protecting your family at a very low cost. Even with its plain vanilla image it's important to understand
some of the basics before purchasing.
compared to traditional whole life policies, term life insurance is substantially cheaper. Its reasonable rates
allow for the purchase of much larger coverage than can be afforded from permanent life insurance. Term
insurance covers you for a specified period of time, usually 5, 10, 20, or 30 year periods. As the name
implies, term insurance is temporary, for a set period of time. Unlike universal or whole life insurance it does
not accumulate cash value.
When planning for your families financial future it's important to keep in mind that term life expires and it is
possible to outlive your policy. If you're looking for permanent insurance that builds cash value whole life
insurance may be the answer for you. Term life insurance on the other hand is often referred to as pure
insurance protection because it builds no cash value. Its primary purpose is to provide for the financial
responsibilities of the insured in an affordable manner.
Determining How Much You Need
There are several methods used to calculate an individual's need for life insurance. They include but are not
limited to, rule of thumb, human life approach, and needs based approach.
- Rule of Thumb
her annual salary. If the insured makes $50,000 a year, a policy in the amount of $500,000 would be
appropriate. This is the simplest of all the methods for obvious reasons.
- Human Life Approach
lifetime.
- Needs Approach
of insurance needed. Total assets are subtracted from the total financial obligations to determine the
amount of life insurance needed. These obligations commonly include mortgage payments, future
educational expenses, future income for family, funeral expenses, and more.
Term or Straight Term The amount of death benefit you purchase remains uniform for as long as the
policy is in force. The premiums also stay the same for the life of the term
chosen. Level term is by far the most popular types of term insurance.
Decreasing TermThe amount of death protection you purchase decreases over time, but your
premiums stay level throughout the term of the policy. Decreasing term is
typically purchased by those who expect their insurance needs to diminish
over time. Some examples would be to cover a mortgage or a business loan.
Both of which would have decreasing obligations over time. Families with
younger children often utilize decreasing term insurance; as the children age
the need for insurance diminishes up until they leave the nest.
Annually Renewable TermThe amount of death protection you purchase will stay the same, but your
premiums increase every year. These policies are typically purchased by
younger individuals looking for an inexpensive policy when they're young, but
as they age the premiums become more costly.
Convertibility PrivilegesMany term life insurance policies offer a convertibility privilege. This is a nice
feature that allows you to convert your term policy to permanent life insurance
for an equal, or lesser amount of coverage. The big benefit to this is that you
can do so without any evidence of insurability. With no required medical exam
you could complete the conversion, even if diagnosed with a terminal illness.
Insurance companies often hedge against this by establishing a maximum age.
Buy Sell Agreement
Term insurance is often purchased by business associates to cover anything from
a deceased partner's share of a company to outstanding debts. This is often
referred to as a "buy sell agreement". This binding contract is negotiated between
key business partners and covers future ownership issues. It is also utilized for key
employee insurance. This is designed to protect the company against the hardship that may result from the
possible loss of a valuable contributor. Key employee insurance is very common in small businesses where
there are a small number of employees and the loss of a "key" employee could prove detrimental to the
business.
Return of Premium Life Insurance (ROP)
Would you like term insurance that refunds your money if you don't die? Well now you can—it's called Return
of Premium Life Insurance. One of the biggest objections to buying term life insurance is that people see
themselves outliving the specified term and often think of the premiums as wasted money. The insurance
industry has answered that objection with the recent introduction of Return of Premium term life insurance.
Return of Premium or ROP combines the benefits of traditional term life insurance with a return of premium
feature. Simply put your family receives a lump sum death benefit if you die, otherwise if you win your bet
with the insurance company and you live the insurer returns all your premiums. This money-back guarantee
can be particularly comforting for those that believe death will not occur during the term of coverage.
What's the catch? Well it does come at a cost. Since the insurance company is obligated to pay you back at
the end of your term, Return-of-Premium life insurance does cost more than regular term insurance. A typical
ROP policy may cost approximately 25 percent to 50 percent more than standard term life insurance. And
policies typically have to be held for the 10 to 30 years to receive a return of all premiums, though many
insurers offer a pro-rated return if held for a few years. In some cases taking the extra premiums that would
have been paid and applying them to a disciplined investment approach may provide more flexibility.
Conclusion
Without a doubt straight term offers the best bang for the buck of all the life insurance types. Combine that
with the fact we're living longer healthier lives and you've got a pretty attractive arrangement. The number of
deaths in individuals age 25 to 44 has decreased significantly over the past ten years, resulting in individual
life insurance premium price drops of 5 percent on average since 2000, according to the Insurance Information Institute. Making term life insurance more affordable than ever.
Term life insurance may be one of the best deals in town, but it pays to shop around when looking for a term
insurance quote. You'll want to find a qualified agent that isn't tied to just one single insurance company.
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