Term Life Insurance
Term Life insurance, also referred to as temporary life insurance, is the least expensive type of life insurance. The reason for this is that term life insurance only pays out if the insured person dies in the designated time period. Also, term insurance doesn’t build cash value over time like other insurance policies and is therefore mainly purchased for the security provided by the death benefit. Policies can usually be taken out for 5, 10, 15, 20, or 30 years. Many policies have an option of changing to a permanent life policy.
The biggest advantage of term life insurance is the low premiums. The biggest disadvantage is that your coverage may expire at the end of your term, which can leave you with nothing to show for your investment.
There are 3 basic types of term life insurance.
1. Decreasing Term
2. Level Term
3. Annual Renewable Terms
Purchasing term life insurance on an annual basis is probably the easiest. The payable premium is only the expected probability of the person dying within that year, plus a few small fees, such as a cost and profit component. Insurers can choose whom they decide to ensure, therefore the probability that the person they choose to insure, dies, is generally going to be very low. Because of this reason, and also the fact that this policy isn’t very cost effective, most people choose not to purchase one-year terms.
Many people go with annual renewable terms (ART). In ART, a premium is paid for the coverage of one year and then is guaranteed to be continued each for so an X number of years, this could be anything from 10 to 20+ years, depending on what the insured person decides on. Even though this type will cause the insured to pay a higher premium, the probability of the benefits paid will be higher.
A level term is probably the most popular type of term life insurance. This is a renewable annual term with a premium that stays constant for X amount of years. These terms are usually 10, 15, 20, and 30 years. Level terms are normally charged at a higher premium for a longer amount of time, simply because as people get older they are more expensive to ensure. Even though they are more likely to be paid the benefits in the end, many people are not comfortable with regular life insurance for whatever reason. For these types of people, term life insurance is a great choice because it gives one the option of having life insurance for a certain time period with the option to be renewed annually.