What is Term Life Insurance?
Term life insurance is the least expensive and least complicated type of life insurance. It can cover immediate needs or may provide future opportunities to move or convert to permanent life insurance without providing medical proof of health or insurability. Term life insurance can be used as the initial step before purchasing permanent life insurance.
Term plans may be renewable after 5, 10 or 20 years without supporting medical evidence. Typically premiums are guaranteed to remain level depending on the term that you have chosen. If you die within the specific term period, the death benefit that was purchased is paid to your beneficiary. If you are still living at the end of the term, you usually have the option of renewing the term at a higher premium rate based on your current age or convert the policy to a whole life or universal life policy. No medical evidence is usually required at each renewal period.
Who Purchases Term Life Insurance?
Term insurance is designed for people with;
- a temporary need for life insurance protection;
- those who need a large amount of insurance protection but have limited budgets;
- Individuals with specific business needs, such as business owners who wish to cover the life of a specific employee that has a set number of years until retirement.
Term insurance can be used to supplement other coverage when one has added financial responsibilities for a specific period of time, such as a mortgage or college expenses for your children. A couple with young children and a mortgage might buy term life insurance as an affordable way to get full coverage they need at the present time.
Another advantage of term insurance is that proceeds to the beneficiary are received free from income tax.
Level Term Insurance
A level term insurance policy provides a level amount of term insurance coverage for a specific period of time. This type of insurance would be appropriate if the amount of obligation will not change over the term. For example, level term insurance could be used to cover a loan when the principal amount does not change and the client makes interest payments only
Increasing Term Insurance
Increasing term insurance provides a death benefit that increases by a specific amount on each policy anniversary. The increased amount may be a fixed percentage or according to another variable like the consumer price index. For instance, an owner that is worried about the tax implications on his property in the event of his death may want to purchase insurance that rises with the value in keeping with increasing tax liability.
Decreasing Term Insurance
Decreasing term insurance provides life insurance protection that decreases by a specific amount on each policy anniversary. In most decreasing policies, the policy owner pays the same insurance premium for the coverage that reduces over the term of the insurance coverage but the face amount decreases during the time. The reduction may be a specific amount applied on each policy anniversary or in the case of mortgage insurance the decreasing feature may follow the amortization of the mortgage principal.