Term life insurance, as the name suggests, provides life insurance for a limited period of time – or term.
Other types of policies – such as whole life, universal life or variable life – are considered to be permanent insurance, and are designed to provide protection for the life of the insured.
Term life insurance might be compared with an automobile insurance policy. While the auto policy is in force, the insured is protected against loss from an auto accident. If no accident happens, no benefits are paid under the policy. At the end of the period covered by the policy, there is no refund of premiums paid.
Term life insurance works in much the same way. It provides only pure insurance protection and does not have the cash value feature typically found in most permanent life insurance policies.
Unlike most permanent policies, in which premiums usually remain level over the life of the policy, the periodic cost of term life insurance increases as the insured becomes older. The cash-value feature found in permanent polices provides a cash build-up within the policy, which allows for the level periodic premium.
In later years, premiums for a typical term life policy will far exceed those of the typical permanent policy.
There are a number of different types of term insurance.
Annual renewable term:
- This is term life insurance characterized by a level death benefit, a premium that increases at each annual policy renewal, with no cash-value accumulation.
Level premium term:
- Annual premiums are fixed for a specified period, typically five, 10, 20 or 30 years. The death benefit remains constant, and there are no accumulated cash values.
- A policy that has a level premium, a decreasing death benefit, and no accumulation of cash values.
- In some cases, term life is teamed with a permanent policy to provide the benefits of both types of policies. A number of optional policy provisions, commonly referred to as riders, can be added to a basic term life policy, generally through payment of an additional premium.
- This provision allows the policy to be renewed at the end of the term without the insured having to show that he or she is still insurable.
- It provides the insured the option to convert a term policy to a permanent policy, without having to prove good health. This provision is very important and should be understood carefully. The period of time when you can convert, and under what circumstance, can explain the difference in cost from one term policy to the next.
- This pays the beneficiaries double the face amount of the policy if the insured dies in an accident. There are some term policies that pay only in the event of accidental death, so beware.
Waiver of premium:
- It waives the payment of policy premiums if the insured becomes disabled and unable to work.
Accelerated death benefits:
- The provision allows for payment of part of a policy’s death benefit while an insured is still alive. Such benefits are typically payable when the insured develops a medical condition expected to lead to death within a short period.
- The newest variation on term insurance is known as “Return of Premium.” An ROP policy guarantees to return to the policy owner the premiums paid if the insured survives to the end of the term period. If you buy an ROP for a 20-year term, and are still alive after 20 years, you get all your premium payments back.
If you have term insurance, or are considering buying some, ask your life insurance agent to explain all of the policy’s benefits so you can be sure it is the correct policy for you.
Bob Hollick is a State Farm Insurance agent based in Washington. His column appears every other Thursday in the Observer-Reporter.
To submit columns on financial planning, investing or business-related matters, email Rick Shrum at firstname.lastname@example.org.