What Is Term Life Insurance: Different Types, Benefits

Term life insurance, also known as “pure life insurance,” is one popular type of life insurance. It’s straightforward, affordable, and lasts as long as you need it. Premiums can be paid monthly or annually, and your beneficiaries get a tax-free lump sum of money after you die.  It is a type of death benefit that pays the heirs of the policyholder throughout a specified period of time.

The policyholder has three options after the term has ended: They can choose to convert their term life insurance policy to permanent insurance, renew it for another term, or let it lapse.

Term Life Insurance

How Does Term Life Insurance Work

Term life insurance is simple to administer and less expensive than permanent life insurance, which covers you for the rest of your life and has a cash value. When you purchase term life insurance, the insurance provider determines the premium based on your age, gender, and health as well as the value of the policy (the payment amount).

The insurance company might request your driving license, medical report, smoking status, hobbies, occupation, and family history. You can choose your term length and coverage amount so you don’t pay for more financial protection than you need.

The insurer will pay your beneficiaries the face value of the insurance if you pass away within the policy period. Beneficiaries may use this cash benefit to pay for your funeral and medical expenses, consumer debt, or mortgage debt, among other things. It is generally not taxed.

Term Life Insurance vs. Whole Life Insurance

 Most insurance buyers will want to choose between purchasing term or whole life insurance. Term life policies have no significance other than the assured death benefit. There is no savings component as found in a whole life insurance product.

READ: Difference Types of Insurance Policies and Coverage

Term life is the less expensive life insurance option because it provides only a death benefit and the benefit has a restricted duration. Whole life costs five to 15 times more than term life for similar coverage amounts. That’s because the whole life lasts longer and has an extra savings feature called the cash value. Purchasing a whole life equivalent would have substantially higher premiums, perhaps $200 to $300 per month or more, depending on the provider.

The majority of term life insurance contracts end without disbursing a death payment. When compared to a permanent life insurance policy, this reduces the insurer’s overall risk. Because of the lesser risk, insurers can set cheaper premiums.

Term Life Insurance vs. Convertible Term Life Insurance

Life insurance policies take two basic states, either term insurance or permanent life insurance. One of these variations is convertible term life insurance, which lets you convert your term insurance policy to a permanent life policy without a medical exam or health assessment. 

The conversion rider ought to give you unrestricted conversion to any permanent policy that the insurance provider provides.

The main characteristics of the rider are choosing when and how much of the coverage to convert, as well as keeping the term policy’s initial health rating upon conversion, even if you later develop health problems or lose your ability to be insured. Your age at conversion serves as the foundation for the new permanent policy’s premium.

Types of term Life insurance

Although level-term life is the easiest and ideal choice for most individuals, Term life insurance comes in a variety of types. The best option will depend on your individual circumstances.

Level term Policy

Level Term which is also known as “level premium policy,” is the most common term for life insurance. It provides coverage for a period ranging from 10 to 30 years. The death benefit and the premiums are fixed when the policy is purchased.

The premium is comparatively more expensive than that of annual renewable term life insurance since actuaries must take into consideration the rising expenses of insurance during the course of the policy’s effectiveness.

Decreasing Term Policy

These policies’ premium stays the same, but your death benefit goes down the longer you have the policy. It has a death benefit that declines each year, according to a predetermined schedule.

Decreasing term policies are often used in concert with a mortgage, with the policyholder matching the payout of the insurance with the declining principal of the home loan. It typically doesn’t have medical conditions for approval, but that means they’re usually more expensive than a traditional term policy.

Yearly Renewable Term (YRT) Policy

Yearly Renewable Term (YRT) Policies Also known as “annually renewable,” Term policy has no specified term but can be renewed every year, but you need to renew each year to continue your coverage, with rate changes at each renewal. 

Premiums usually start lower than for a policy with a longer term but eventually become much higher the longer you renew. it rises from year to year as the insured person ages.

Return of premium (ROP)

Another term policy is Return of the Premium, which is occasionally offered as a stand-alone contract but is more frequently seen as an optional addition that may be added to your insurance for a fee. If you live longer than the period of your insurance, ROP coverage reimburses your earlier premium payments. However, the insurance is expensive.

Benefits of Term Life Insurance

A term life insurance policy is best for the majority of people because it’s simple and budget-friendly and s attractive to young people with children. The parents can get comprehensive coverage for a reasonable price. The family can count on the dividend to make up for any lost income if it becomes necessary.

Additionally, those with growing families would benefit from these policies. The main benefits of buying a term life policy are:

Flexibility: You can get financial protection that is suited to your needs due to the flexibility of the term length and coverage levels.

Low cost: Rates are much less expensive than those for any other kind of life insurance. This makes keeping your coverage active while saving and investing simple.

Simplicity: Fees, interest rates, and other elements must be managed for policies with cash values. Term life insurance doesn’t have any of those, making it simple to use for its primary purpose of providing for your family in the worst-case situation.

No cancellation penalty: There is never a charge or penalty for terminating term life insurance, in contrast to other policies. You can easily terminate your contract if you decide you no longer require it.

Add a Comment

Your email address will not be published. Required fields are marked *