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Term life insurance is a life insurance policy that is established to provide a death benefit to a named beneficiary for a set period of years.
Usually, the death benefit remains the same for a 10, 15, 20, or a 30 year period, with the premium, or cost remaining the same. At the end of the term period, the coverage ceases to exist.
The purpose of a term policy is to provide life insurance coverage while the need is the greatest, and presumably, when the need is no longer there, the coverage is not required, so it ends.
This provides maximum coverage at a minimum cost as opposed to having to cover the insured for the rest of his or her lifetime.
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–Forms of Term Life Insurance
- Level Term – Level term life has a level death benefit for the duration of the coverage period with a level premium. At the end of the term period, the coverage ceases and so does the premium
- Decreasing Term Insurance – Decreasing term has a decreasing benefit over the period of the term period. With this form of coverage the premium remains level, and at the end of the term period, the coverage and the premium cease to exist and ends. Decreasing term coverage is used many times to cover a mortgage, and the coverage is mathematically designed to decrease as a mortgage does in a parabolic downward curve.
- Annual Renewable Term Insurance – The annual renewable term policy has a death benefit that remains the same, but the premium cost of the term increases each year to match the increasing mortality cost. The premiums are very inexpensive in the beginning, particularly at younger ages, but becomes prohibitive as a person reaches the older ages.
- Term Life Riders – A term life rider can be attached to any permanent life policy to add flexibility in the ways of coverage and cost. A very creative and cost-effective life insurance program can be devised by using term life insurance riders.
Life Insurance Needs and Applications
–The Human Life Value Concept
In the early part of the 20th century, Soloman Huebner, dubbed as the “father of modern life insurance” put forth his human life value concept. This stated that each person’s greatest asset was his or her ability to earn an income and that this “human life value” should be insured.
Huebner stated that it would be unthinkable to only insure part of your home, business or other property, so why not insure the potential earning power of your income?
Huebner had attained his Ph.D. at the Wharton School and went on to become a force in the life insurance industry.
He was responsible for the formation of the American College in Bryn Mahr, Pa and the CLU and ChFC movement.
This led to life insurance programming and Tom Wolfe’s Capital Needs Analysis, which give credibility to life planning in the life insurance arena.
–Insuring The Human Life Value
If we are to insure the human life value of an individual, it becomes obvious that we cannot do the best job by just using term life insurance because it is going to end its coverage at some time in the future.
We are going to need some form of permanent life insurance coverage too. Placed either in part, in combination with a term life policy, or entirely in the form of permanent coverage, the life insurance will have to stand the test of time to be adequate.
The Magic of Term Life Insurance Conversion
–Purchase Convertible Term Life Insurance When You Are Young and Broke
The cost of term life insurance for people who are young and in good health is ridiculously low. The main reason for this is that hardly anyone dies at the younger ages from a life insurance mortality standpoint.
Most of us live until age 65 any beyond. Why not purchase the entire amount of life insurance coverage that you will need in the form of term insurance, and then gradually convert parts of it as you grow older and your income increases?
Convertible term life insurance is just that, life insurance that guarantees the policy owner the right to convert the term policy to a permanent policy regardless of one’s health, occupation, background or any other detrimental aspect of one’s lifestyle or medical condition.
–Develop a Plan and Stick To It
If a plan is well-thought-out with early term insurance to be converted later to permanent coverage can be laid out, it is a very logical and useful program for a lifetime of security.
For example, if you have an entry-level employee, who is 25 years old, who earns $60,000 per year, has two young children, and he earned no more income until age 65, he would earn a total of $2,400,000 during his career.
He could be a professional person, a government worker, or a self-employed business person. It is likely to assume that a person in this category would increase his income over the years.
The purchase of a large amount of convertible term insurance, say of 1,500,000 would be easy to justify to an insurance company allowing this level of coverage.
The price of this policy would be a relatively modest one in light of the large death benefit.
A plan of converting the convertible term insurance to permanent insurance on a schedule which could be tied to increases in salary would be a reasonable plan.
The purpose of having the permanent insurance would be for having coverage later in life when the term expires, for possible estate liquidity purposes, and for the cash value purposes for retirement.
It should be noted that permanent life insurance of some kind is preferable in estate planning circles because it will last as long as the person does for whom the estate is being planned. Convertible term insurance could be used, and if the principle person needs to, in the case of illness, the term could be converted to a permanent policy.
Having the option to be able to convert term life insurance to permanent life insurance gives a term life insurance policyholder maximum flexibility in how to manage their overall life insurance portfolio.
There is very little predictability in the long term outcomes of life in general, and having this kind of control over the makeup of one’s life insurance is critical to the family or business involved.
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