We’ve all heard about the importance of investing in life insurance; this is something many people stress about daily. However, once you understand how it works, things will seem more straightforward. To begin, what is term life insurance ?
Term insurance is a life insurance policy that offers protection for a specific “term” of years or a set amount of time. A death benefit will be paid if the insured passes away within the time frame specified in the policy and the plan is active or in effect.
In the beginning, term insurance is far less expensive than permanent life insurance. Term life insurance doesn’t have a financial value, unlike most permanent insurance options. In simpler terms, the policy’s guaranteed death payout is its sole worth.
How Term Life Insurance Works
Term life insurance coverage comes in a variety of forms. Numerous policies offer flat premiums for the policy’s whole term, which might be 10, 20, or 30 years. ‘Level term’ policies are common names for these. Insurance firms charge policyholders a specified amount, usually monthly, to offer the benefits associated with the insurance plan.
The health, age, and life expectancy of the individual are considered when the insurance company determines the rates. Based on the policy selected, a medical examination reviewing the person’s health and family medical history may be necessary.
Therefore, for the entire term, fixed premiums must be paid. The insurance provider will pay out the face value of the insurance policy if the insured passes away before it expires. There will be no coverage or payment if the period ends and the person passes away after. The new monthly premium will be determined by the policyholder’s health and age at the time of renewal, although they are still able to renew or extend their insurance.
In comparison to the original term policy that started when the person was younger, the premiums for the renewal coverage may be higher.
Based on the age and payout amount, premiums can vary. Someone in their twenties may pay $15 per month for a 30-year coverage with a $250,000 payment, while someone in their fifties may pay less than $60 per month. Of course, premiums vary from company to company considering the policyholder’s smoking history, health, and other considerations.
Types of Life Term Insurance
There are other types of term insurance to consider. Each policy has advantages and disadvantages based on the policyholder’s demands.
- Increasing Term
Some insurance plans let you gradually boost the death benefit. Although the premium increases as well, policyholders can afford to pay smaller premiums in their early years when they have numerous expenditures and obligations. As would be the situation with conventional life term insurance, the increasing term removes the need to qualify for another plan at an older age to receive the additional payout.
- Decreasing or Mortgage Term
The death benefit amount reduces with time under decreasing term policies, which are the opposite of increasing term policies. The objective is to align the drop in term benefit with the decline in the mortgage balance owed by the policyholder. The rationale behind this approach is that you won’t need as much life insurance if you have less mortgage debt. Nevertheless, even though the rates are lower than those for life-term insurance, they remain constant as the benefit decreases.
- Convertible Term
A life term insurance policy, which has a set number of years before expiration, can change into a permanent or whole life insurance policy thanks to convertible term insurance. The primary advantage of convertible life insurance is that when a term policy switches to permanent insurance, no medical examination or assessment of any pre-existing conditions is required.
- Annual Renewable
The term insurance is renewed annually under this option, but the renewal premium is higher because the insured is a year older. Furthermore, the advantage of annual renewable term insurance is that it will always be authorized for coverage. Due to the escalating prices, it might not be the most economical option for everyone.
Looking for Term Life Insurance?
Do you feel more at ease taking out a policy now you know what term life insurance is? Shopping around and comparing options is crucial. MoneySmart can help you compare different insurance premiums, so you can find the right one.
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