Term Insurance
How it works
Term insurance provides coverage, during a specific period of time, at a premium rate that is essentially based upon the amount of coverage and the probability of death during the term. Term insurance is the closest thing to pure insurance protection.
Term periods are typically available for 5, 10, 15, 20, 25, 30 and 35 years, as well as terms to age 65, 70, 75 or 100. Term to (age) 100 policies are basically another permanent insurance option. The face amount of the term policy is the amount of benefit payable to the beneficiaries upon death within the period of the term. Premiums remain level (a constant amount) for the period of the chosen term. The longer the term, the higher the premium.
Advantages, Disadvantages and Limitation of Term Life Insurance
It is the most cost-efficient way to insure a risk that will disappear over time. It can provide a repayment of mortgage, loans and other short term liabilities or allow children to pursue higher education if one or both of their parents dies.
If the purpose of insurance does not have the anticipated expiry date, then term life insurance may not be the best solution. For example, a person wants to leave by will some amount for the beneficiaries but does not have the financial resources then term insurance might not be a solution. In this case permanent life insurance may be the way to realize the goal.
Limitations: Policyowner may not miss any premium payments. Each premium must be paid within the grace period to keep the policy in force. If grace period expires then policyowner must apply to reinstate the policy. Which means he has to pay premiums due(with interest in many cases), and also submit the evidence of insurability of the person whose life is insured. If the health has deteriorated since the policy was first taken out, the insurer can refuse to reinstate the life insurance coverage.
Difference in Level Term, Increasing Term and Decreasing Term Life Insurance
Level term life insurance policy is one that provides a level amount of coverage for specific period of time. This type of coverage is appropriate if the amount of liabilities will not change over the term.
Increasing term insurance provides a coverage that increases on each anniversary by specific amount. The increase might be some fixed percentage or some variable such as consumer price index. The premium also increases along the coverage increase. Example, a person own a property which he feels will appreciate in value and worried about the tax implications upon death. So he can buy the increasing term to keep up with the tax liability.
Decreasing term insurance provides a coverage that decreases on each anniversary by specific amount. In most plans the premiums remain the same. The reduction may be specified amount or, in the case of mortgage, the decreases may follow the amortization of the mortgage principal.
Difference between Renewable and Non-Renewable term Insurance
Renewable term life insurance allows the policyowner to renew the insurance coverage without providing the proof of insurability (i.e. health questionnaire, blood sample, urinalysis). But the premium is based on the age of the person at the time of renewal.
Non-Renewable term insurance does not include the option to continue the insurance coverage beyond the stipulated term of coverage.
Explanation of the term "convertible term Insurance"
If the insurance policy is reaching its term, but the insurance risk remains, convertible insurance policies offer an opportunity to convert the coverage to a permanent life insurance plan. If the person wants to have the same level of coverage, the new premium may be expensive according to the age.