Term life insurance provides coverage for a specified period of one or more years. It pays a death benefit only if you die during the specified term and if you have paid the required premiums to keep it in-force for the term. Term insurance usually provides the largest amount of death protection for your premium dollars. Most term policies are guaranteed renewable for one or more additional terms, even if your health has changed. Each time you renew the policy for a new term, the premium payment will be higher and it will usually remain level for the balance of the term. If you are considering term insurance, be sure to check the premium schedule at the specified renewal ages, and find out for how long the policy can be renewed, if you decide to keep it.
Many term insurance policies can be exchanged for a permanent policy during the term period. This conversion privilege could prove to be very important, especially if your health deteriorates and you are unable to qualify for a new permanent policy. Be sure to check the conversion eligibility period as you review the coverage, before applying for a policy.
Types of Term Life Insurance
Common types of term insurance include:
- Annual Renewable Term (also known as yearly renewable term): Features an annually increasing premium and a level death benefit.
- Level Premium Term: Features a level premium for a specified number of years (the premium may or may not be guaranteed to remain level). At the end of this level premium period, some policies allow you to renew coverage for another term at very favorable rates, provided that you meet the company’s underwriting criteria (i.e., your health remains good). This type of coverage is known in the industry as re-entry term. If you don’t meet the company’s current underwriting standards and thereby do not qualify for the re-entry term rate, you can still keep the coverage in-force for a specified period of years by paying a higher rate set forth in the policy.
- Decreasing Term Insurance (sometimes known as Mortgage Insurance because this type of coverage is often used for mortgage cancellation in the event of the premature death of the family’s primary wage earner): Features a level premium and a decreasing death benefit. Since coverage decreases gradually over the years, the premium will be considerably lower than level premium term.
- Return of Premium Term: Allows the policy owner to receive the sum of premiums paid (sometimes with interest) after a certain term of years, usually the end of the level premium period.