One of the age old debates when someone decides that they need to buy life insurance is what is the best kind to purchase. There are so many flavors and options it can become overwhelming. Rather than hashing that out today, we felt it best to focus on simply defining one of the most useful kinds of life insurance in the market place today. Term Life Insurance.
What Is It?
The name Term Life Insurance implies that the company is providing coverage for a defined period of time, otherwise known as the Term. At it's simplest, the insurance company will provide an amount of money to the beneficiary of the policy upon the death of the named insured if the policy is in force. Because there is a time constraint on the policy, the in force statement becomes very important.
- The amount of life insurance involved in the policy, otherwise known as face amount, can very greatly from as little as $25,000 up into the millions of dollars.
- The coverage is set to be in force via a level payment for the length of that policy term.
- The time periods associated with those terms can range from five years to 30 with the numbers generally ending in either a five or zero.
- The contract stipulates that if you were to pass during that time period, assuming that you had made all the payments, the company will pay you the face amount after satisfactorily making a claim against the benefit.
Who Would Buy It?
Because there is a confined time period that the policy will be in force, the reality is that insurance companies only pay out death claims on less than 5% of the policies that are issued. As a result, the premiums are incredibly cost efficient for the amount of coverage that one may need. Because of this efficiency in price, we use this type of life insurance a lot for younger families who are carrying a higher debt load and have a tighter budget. The primary earner for the family wants to make sure that the family is cared for even in their absence, and term life insurance makes a great way to do that.
Another group of people that we work with that buy Term life insurance are those that are focused on debt elimination and cash accumulation. Since the most debts are time bound and this group of people are trying to eliminate them altogether, they find the time bound nature and cost to be an effective mechanism to hedging against the loss of an income.
In the end, there are a lot of applications for Term Life Insurance, but most of them revolve around the idea of the need for a death benefit of some size and a cost efficient premium to obtain it.
What Happens At The End Of The Term?
If you purchase a 20 year term policy and the death benefit is not paid, there are a two main options that will be in play for you and your family. They may surprise you based on what can happen. When the Term is over, you will now be 20 years older than you were when the policy was put in force. Life has changed and your weight and health condition will likely have changed with it. And generally not for the better. So what do you do if you still need life insurance?
The great news is that most of the term policies that you obtain will do what is effectively an annual renewal of that policy for a year at a time. This renewal will be done at your attained age (think 20 years older), but will not require you to go through underwriting again. That means that you won't have to fess up about the diabetes that may now be in place to keep life insurance in place. So even though the cost will change due to you being older, not being surcharged for health conditions may actually be in your best interest. This process will be allowed to continue for as long as you pay premiums, but can become expensive as you age.
If you no longer need life insurance at the end of the term, or the attained age option above is not palatable, you can simply cancel and walk away. It's really as simple as that. Many people compare this to renting an apartment in that you will not receive value for the premiums paid, but the coverage will have protected you when you needed it most.
Are There Other Options Than Those Two?
As consumers and life insurance companies have become more sophisticated, they have begun to create other options to the annual renewal at the end of the term or simply walking away.
- One rider that can be added to some term life insurance policies is known as a Return of Premium. When you get to the end of the specified contract the life insurance company will return all of the premiums that you paid in a lump sum. This option has appeal for folks who know that they are very unlikely to continue the policy upon the completion of the term period. The draw back to this coverage is that it comes with a price tag. Do you want to pay extra to get all of the money back later?
- An option that many policies offer is the concept of conversion. Conversion will allow you to convert all or some portion of your face value into a permanent life insurance policies. This is done on an attained age basis, but generally does not require underwriting to be opened up again. If you have had something major change with your health, this can be a great option. The biggest thing that this option will give you is the ability to keep a smaller amount of insurance to cover final expenses when you finally do pass on from this earth.
Life Insurance can be a complex topic. Even Term Life Insurance can become a mouthful to discuss. The goal of the agents at Insurance for Texans is to make it simple. If you know that you need Term Life Insurance, feel free to use our technology to view various quotes right now by visiting our rater page.