The Basics of Term Life Insurance
Whether you are new to the whole term life insurance idea or you are still baffled by the variety of types, overwhelming regulations and restrictions, or the complex terminology, we are here to clear things up.
Take it from me, before researching the topic, I had little knowledge of what term life insurance even meant. But, after reviewing creditable sites and collecting information needed to understand term life insurance, I feel that the basics are easy enough for just about anyone to grasp.
So, here it goes
Term life insurance can also be referred to as term assurance. It provides an individual coverage for their financial responsibilities in the event of them dying. Financial responsibilities typically covered by term life insurance include consumer debt, college expenses for dependents, funeral costs, mortgage balances, and dependent care needs.
Term life insurance is defined as “a fixed rate of payments (premiums) for a limited period of time (term)”. The insured individual is guaranteed a rate until the term ends. Once it ends, the insured has to either forgo coverage or negotiate to obtain coverage with different conditions and premium rates.
As with other insurances, term life is basically risk protection. Insured individuals are paying in case an accident or claim occurs. If nothing happens during the term of the insurance, no money is returned or paid to the insured. This fact makes term life insurance one of the most inexpensive policies to obtain. Insurance Companies are able to discount the rates because a majority of the policies will expire without them having to pay a dime. Other policies, like permanent life insurance, become expensive because the insurance companies always have a pay out at the end since the insured individual is covered until they die.
Two important factors to consider when purchasing term life insurance are the amount of insurance to purchase and the types of insurance available. The rule of thumb when determining the amount to purchase is to multiple the insured individuals annual salary by ten. So, say someone makes $80,000 per year then they should purchase $800,000 worth of life insurance.
As for the types of term life insurance, there are three commonly purchased options. These include Annual Renewable, Guaranteed Level Premium, and Decreasing Term. Annual Renewable Term Life Insurance is based on a term of 1 year but the policy will state a given period of years (examples are 10, 20, or 30) where the term is guaranteed to be renewed. Premiums will increase slightly each year but coverage will most likely remain the same.
On the other hand, Guaranteed Level Premium Term Life Insurance keeps the same premium rates and coverage year after year making your monthly payment amount higher from the beginning. In the final type, Decreasing Term Life Insurance, premiums stay level but coverage amount decreases over time. This type is usually purchased if the financial coverage needs of the insured will lessen over time. For example, if they have a large mortgage that they will be paying off or they have a retirement savings that they will have access to in a number of years.
A final aspect to consider in regards to term life insurance is guaranteed re-insurability. This clause is a positive one to have in an insurance policy. It simply means that the insured can renew their term without having to show proof of insurability (medical records, financial statements, etc). This aspect can save those that might fall ill during their covered term and traditionally not qualify for a renewal. They are guaranteed a renewal of their insurance policy, no matter what.
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