Term insurance is designed to provide death protection for a definite and limited period of time such as One Year Term, Five Year Term, 30 year Term, or Term to 65. If the insured dies during the term, the policy matures and the insurance company pays the face amount of the policy to the beneficiary. If the insured doesn't die during the term, the policy expires.
The second most important characteristic of Term insurance is that it is pure insurance. You pay premiums only for the coverage. Since there are no forced savings or cash value attached to Term insurance, it is designed to provide the greatest possible protection for the lowest possible cost. Therefore, the two key points to remember about Term insurance are that if offers (1) protection only for a (2) a specified period of time.
One of the most widely marketed forms of Term insurance is Annually Renewable Term (ART). The insurance company grants the insured the right to renew the policy each year to a stated date or age. The cost to renew the policy goes up each year because the rates are based on the insured's attained or current age.
The increasing in premiums can present a real problem for the insuring public. One Term product that provides a partial solution to the rising costs is Level Premium Term. With a policy of long duration, the payment may be leveled out over the life of the policy to create Level Premium Term. The cost of Level Premium Term is calculated by price of the early years by the price of the later years. So in the beginning, you are making an overpayment of what the actual cost of insurance is. But in the later years, you are making an underpayment of what the actual cost of the insurance is. Why? Because the cost to insure someone is young is low compare to the cost of insuring someone who is old.
Term insurance, then, in any of its many forms, is the most affordable protection available for the premium dollar. It is particularly suitable for a person who only need temporary need for protection (See Theory of Decreasing Responsibility), for a person who may want permanent insurance in the future, or for the person who has the discipline to buy Term and really invest the rest.
There are 5 types of Term insurance you should know about:
1) Level Term
2) Decreasing Term
3) Increasing Term
4) Renewable Term
5) Convertible Term
LEVEL TERM: Coverage remains constant throughout life of the policy. Premiums remain constant for the stated period of time.
DECREASING TERM: This is where coverage decreases over time, but premiums usually remain constant. This is suitable for someone who has decreasing financially responsibilities over time such as a mortgage payment. If you purchase life insurance from a mortgage company, it is most likely a decreasing term insurance.
INCREASING TERM: Death benefit increases each year and premiums goes up as well. This is suitable for someone who see that he/she will have increasing financial responsibilities over time (such as having kids or buying a new home).
RENEWABLE TERM: In addition to normal benefits found in a Term policy, you can make a Term policy renewable without having to provide proof of insurability. The most common forms of Renewable Term are Five Year Renewable Term or Annually Renewable term. The premium will remain level during the policy period, but will increase at renewal due to the insured's newly attained age.
CONVERTIBLE TERM: With this form of Term insurance, you have the right to convert a Term policy to any form of permanent protection (such as Whole Life) without having to show proof of insurability. Most companies stipulate the length of the period in which this privilege may be exercised. If the insured fails to convert before the deadline, the right to convert is lost forever, but the term insurance coverage can be continued. When conversion is made, the premiums will increase significantly because permanent forms of insurance are more expensive than term insurance and also because the new premium will be based on attained age.
