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Define Term Life Insurance

by Admin on October 27, 2011

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he time when people think about buying life insurance is usually when they are in the process of a life changing event. This can include getting married, having a baby or buying a house. Life insurance is very important to ensure our sense of security. Buying it is truly a expression of love for your family. We can define term life insurance as a simple type of life insurance policy that provides protection for a period of time. It was started to provide protection on a limited budget. It is usually the least expensive type of life insurance because if you are alive when the term ends there is no payout. If you should die, your beneficiary receives the face amount of the policy. It can be purchased in large amounts for a relatively small initial premium.

How does term life insurance work? It provides coverage at a fixed rate for a period of time (term). When this period ends coverage at the rate given is no longer guaranteed and the client must obtain further coverage with different payments and/or conditions to the policy. It is similar to other types of insurance if the premiums are up to date and the contract not expired it pays out. Term life insurance is a death benefit, plain and simple. It is chosen in place of permanent life insurance frequently because it is much less expensive.

While these policies are money savers, the main problem with them is renewability. Sometimes the insured has acquired a terminal illness during the term but did not actually die. Because of this, the insured would most likely not be insurable after the initial term ends. He would not be able to renew the policy or get a new one. Some term policies have a feature built in called “guaranteed reinsurability” that lets the insured renew with proof of insurability, helpful but you will pay higher for it.

Annual Renewable Term and Level Term Life Insurance

One type of term insurance is ART (annual renewable term). This type of policy is guaranteed to be continued each year for a certain period of years. This is usually 10 to 30 or age 95. As the insured gets older, the premium goes up with each renewal. The chances of this being paid out are much higher so the cost of the policy goes up during the period incrementally.

Level term life insurance is another type of term life insurance. The premium is guaranteed to stay the same for a given amount of years. The premium paid stays the same for the whole contract. The cost is based on the amount of each year’s renewable term rates and a time value of money adjustment made by the insurer. The longer the term, the high the premium because the older more expensive years are averaged into the premium. Most of these include a renewal option at a high guaranteed rate if the period needs to be lengthened. The renewal may or may not be guaranteed, also check to see if evidence of insurability is required to renew the policy.

Permanent Life Insurance and Universal Life Insurance

If you are looking for something more permanent many life insurance companies will allow you to convert your term life policy to a permanent life insurance policy offered by the company while the policy is in force. Term life differs from whole-life policies in that they are not permanent policies. Cash value builds tax deferred in a whole life policy each year you keep it. The premium usually stays the same throughout the life of the policy also.

Universal life is also a permanent policy that combines investments that pay a rate of the market return. These policies do not guarantee a certain rate. Variable life and variable universal life are permanent policies with an investment fund in stocks or bonds. Again as with universal life, returns are not guaranteed.

How Much Life Insure Should you Buy?

How much life insurance should you buy? Financial planners say you should have enough to equal five to seven years of your salary. If you have young kids or a lot of debt, you should up the amount.

The best thing about term life insurance is that you are buying coverage that lasts a set period of time provided you pay you premiums. When you are young, the premiums for annual renewable term life insurance policies are extremely inexpensive. This can be as low as several hundred dollars a year for $250,000 worth of coverage. As you age the premiums do go up but the term gets longer, anywhere from five to thirty years.

Life Insurance Explained

In this video you will get some valuable information through insightful examples about life insurance, cash value and term insurance.

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