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Term life insurance is coverage that is designed to last only for a period of time and then it will expire. Usually, it is sold for 10, 15, 20, or 30 years. It is less expensive than permanent life insurance which is designed to be in effect for the lifetime of an insured, which is normally until age 100.
If an insured person dies during the term period, then the amount of insurance, also called the face amount is paid directly to a named beneficiary. There is no death benefit outside of the period the term policy is in effect. Once the period is over the policy expires.
Learn more about term life insurance below and make sure to use our free comparison tool above!
Different Kinds of Term Life Insurance
Term life insurance comes in several different formats.
- Level Term – The death benefit and premiums are fixed at a level amount throughout the term of the policy
- Annual Renewable Term – The death benefit is level and the premium increases each year. The premiums start at a very low rate at younger ages and winds up being very high at older ages
- Decreasing Term – The death benefit decreases in a straight line each year, and the premiums remain level throughout the term period
- Mortgage Decreasing Term – The death benefit decreases according to a mortgage amortization schedule at a certain percentage rate. If a graph is drawn showing the line of decreasing coverage, it would be a parabolic decreasing curve
- Convertible Term – A convertible term feature can be added to any of the term policies. This allows the term policy to be converted to a permanent policy at any time during the term period. At older ages, a cutoff may be established at a certain age, such at age 55 for example
- Return of Premium – A return of premium rider can be added to a term policy so that at the end of the term period all of the premiums that were paid over the life of the policy is repaid to the policy owner if he or she is still living.
- Renewable Term – The term policy is automatically renewable at the end of the term period, regardless of the health status of the insured
Is Term Life Insurance Renewable?
Of course, we know from our previous list that term life insurance can be renewable. Term life insurance can be devised not to be renewable, or designed to be renewable. For example, a popular renewable term configuration that used to be quite common was a 5-year renewable term policy.
While is has fallen out of favor in current sales circles for some reason, it was a popular way for people to begin their life insurance program if they were on a budget.
Having a renewable feature on term policies will tie a client to you longer, and give the client a better sense of security. It is important to remember that at each renewal date, the cost of the policy will increase.
For example in our 5-year renewable term policy, the renewal ages will happen every five years with a corresponding increase in premium at each interval. The renewals will have a limit in most cases, as they will cease to be available at a certain age, such as age 55 or 60.
With increasing rates at each renewal, it is an incentive for a policyholder to convert the policy to a permanent policy if the convertible feature is available. In this instance, a policy could be both renewable and convertible.
Term life insurance can offer a great deal of flexibility. Having various time periods of choice give a great deal of flexibility in price and durability of coverage. By having a renewable feature, the policyholder is in the driver’s seat.
The ability to convert a policy to a more permanent plan takes all the risk out of the equation if a person should suffer a sudden downturn with their eligibility due to health reasons.
Situations change, and a life insurance program should have some capability to match changing conditions. New additions to the family occur, people buy larger homes with larger mortgages that need to be covered, and so on.
People don’t need to generate less coverage as the years roll by, but at least they will need to maintain the coverage that the currently have.
By having a renewable term program, a policyholder can start their life insurance program at a very modest price with the assurance that they have all of the flexibility of knowing the coverage will be there, but also that they can convert if a convertible feature is available as well.
Annual Renewable Term and Five-Year Renewable Term
When looking at term life insurance people should not overlook annual renewable term and five-year term policies.
These can be very short term coverage policies, and they will also usually give the best rates. For example, if a person wants coverage for just a five year period, either of these type policies might be ideal due to their lower cost compared to a ten or twenty-year term policy.
All things being equal, the annual renewable term is going to be more likely to charge for the current mortality rate as opposed to a ten or twenty-year plan because the longer year plans will spread out the premium charge.
If the applicant buys the convertible feature along with the policy, he or she is really in control because they can do whatever is appropriate in future years.
Renewable Term With Permanent Life Insurance
The candidate who is looking for flexible life insurance plans will also be glad to know that there are many renewable term life insurance riders that fit into configurations with permanent life insurance policies.
For example, a five-year renewable and convertible term insurance rider can offer a terrific premium price with some cash value accumulation as well.
Such a combination can offer a way to package the two features of term and permanent together with great flexibility for change in the future, should conditions change or evolve.
A renewable term concept has been available for years and can be packaged along with permanent coverage, as a stand-alone concept, and in many forms.
The ability to mix and match, so to speak, offers great flexibility as to price and coverage needs giving the insurance policyholder many options for coverage.
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