Life Insurance

Term Insurance Policy

Overview

What is Term Life Insurance?

A type of life insurance with a limited coverage period. Once that period or "term" is up, it is up to the policy owner to decide whether to renew or to let the coverage end. This type of insurance policy contrasts with permanent life insurance, which is intended to provide life-long protection.

Other characteristics of term insurance include:

• Low cost
• No cash value
• Usually renewable
• Sometimes convertible to permanent life insurance

Highlights

Term life insurance policies provide a stated benefit upon the death of the policy owner, provided that the death occurs within a specific time period.

However, the policy does not provide any returns beyond the death benefit (the amount of insurance purchased); the policy has no additional cash value, unlike permanent life insurance policies, which have a savings component, increasing the value of the policy and its eventual payout.

Because of this, term life insurance is also known as "pure life insurance": Its only purpose is to insure individuals against the loss of life, and all premiums paid are used to cover the cost of insurance protection.

Characteristics

Premiums for term life insurance are based on a person’s age, health and life expectancy, as determined by the insurer.

If the person dies within the specified term, the insurer pays the face value of the policy; if the term expires before death, there is no payout.

Policyholders may be able renew a term policy at its expiration, but their premiums will be based on their attained age.

Types of Term Life Insurance

Level Term or Level-Premium

Level term life insurance provides the insured with coverage for a specified period of time; the term may be one, five, 10, 20 years or longer. The premium is calculated based on the age and health of the insured.

The insurer levels out the premium payments by charging more at the beginning of the policy than mortality costs require, so the premium payments are fixed and guaranteed for the duration of coverage.

Yearly Renewable Term

A yearly renewable term (YRT) policy has no specified term and is renewable every year without evidence of insurability. The premiums on a YRT policy start off low and increase each year because they are based on the insured’s attained age.

Although there is no specified term with a YRT policy, premiums can become prohibitively expensive for those at later ages, making the policy difficult to maintain.

Decreasing Term

A decreasing term policy features a death benefit that declines each year according to a predetermined schedule. The insured pays a fixed, level premium for the duration to the policy.

Decreasing term policies are often used in concert with a mortgage to match the coverage with the declining principal of the loan.

Term vs. Perm : Other Factors to Consider

Obviously, there is no-one-size-fits-all answer to the term vs. perm debate; even generalizations are difficult. Proponents of both sides can cite numerous studies and examples based on historical performance that show why their position is the correct one.

But other factors to consider include: Rate of return earned on investments versus permanent policy cash value (and whether consistent investing is feasible for the client).

Whether these investments will be in a traditional or Roth IRA or qualified plan and whether there will be any matching contributions in employer-sponsored plans.

• The type of term policy used and whether it has any riders, such as guaranteed renewable or return of premium.
• Loan provisions and other features in the permanent policy.
• When the permanent coverage becomes paid up.
• Rate of withdrawal of assets at retirement.
• Lifespan of the investor and spouse.
• When Social Security will be taken.
• Whether accelerated benefit riders are purchased and used in either type of policy.
• Whether policyholders expect to carry a mortgage late in life.
• The policyholder has or intends to have a business which requires insurance coverage.
• Whether life insurance could play a role in tax-sheltering a sizeable estate.

Convertible Term Life Insurance

To many, convertible term life insurance offers the best of both worlds. This is a term life policy which includes a conversion rider:

The rider guarantees you the right to convert an in-force term policy (or one about to expire) to a permanent policy without going through underwriting or proving insurability.

The key features of the rider are:

• you maintain the original health rating from the term policy upon conversion, even if you later have health issues or become uninsurable, and
• you decide when and how much of the coverage to convert. The premium for the new permanent policy will be based on your age at the time of conversion.

Of course, overall your premiums increase significantly, since whole life insurance is more expensive than term life insurance. The advantage is the guaranteed approval:

You do not have to undergo a medical exam as a new customer would. Any long-term medical conditions developed during the term life period cannot be used to adjust premiums upward.

Even if there haven't been major changes in your health, insurance companies continually review underwriting standards as new technology becomes available, and you could suddenly go from a preferred to a lesser rating if you tried to buy a whole new policy.

However, if you wanted to add additional riders to the new policy (e.g., a long-term care rider), the insurance company may require you to go through underwriting again, and only offer you the new policy with additional riders at a lower health rating.

The premium for a term policy with a conversion rider may cost more, but it may be worth the small additional cost to have the option of switching to permanent coverage.

The conversion rider should allow you to convert the term coverage to any permanent policy the insurance company offers with no restrictions (i.e., having to convert by a certain age during the first five to 10 years that the term policy is in force, or limiting partial or multiple conversions).

For comparison and knowledge of various coverages kindly click HERE.

Note : Policy details offered are indicative, not exhaustive. Please contact your nearest Arunaya office for further details.