We can all be grateful that Term Life Insurance has a reputation for not paying out. If it did pay out more often, it would simply mean more people are dying younger. Life insurance companies understand this, and that is why Term Life Insurance is inexpensive. Term Life Insurance policies are designed to terminate. They terminate for many reasons: non-payment of premium (whether on purpose or by mistake), the original term ends, policy replacement with a competitor’s product, etc.
Whenever a term policy terminates by any method, while the Insured is still living, the life insurance company makes a nice profit on that policy. However, if the term policy terminates due to the death of the Insured, the life insurance company must pay the death benefit to the Beneficiary of the policy. In this case, the life insurance company takes a huge loss on that policy. Therefore, they must make enough profit from many policies in order to pay the death benefit of one death claim. Life insurance companies do a phenomenal job of offering affordable Term Life Insurance to consumers.
While Term Life Insurance products are inexpensive, they are also somewhat rigid. For example, once you accept the terms of your Term Life Insurance policy, you cannot make changes to the coverage or term length without submitting another full application, which starts the process all over again. Also, as mentioned, on-time premium payments are a must in order to continue coverage.
Meet The Family
There are many types of Term Life Insurance products on the market. Here is a list of the most common types of term policies offered.
Traditional Term (Guaranteed Level) – This is the most popular form of personally owned Term Life Insurance. It’s the one most people are talking about when they refer to, “Term Life Insurance”. It is designed to provide a guaranteed level premium, and a guaranteed level of coverage for a stated number of years. Most of these policies are issued in 10, 15, 20, 25 and 30-year term periods.
Annual Renewable Term – This type of Term Life Insurance is designed to provide a guaranteed level death benefit with the lowest premium payment at the beginning. The policy is renewed every year and your premium increases based upon your new age. With most companies, your health status does not play a factor at renewal. Generally speaking, once you are initially approved for the policy, a company cannot require future health exams or questionnaires, unless the policy enters a lapse phase due to non-payment or late payment. Over time, as your premium increases, this becomes the most expensive form of Term Life Insurance.
Return Of Premium (ROP) Term – This is the newest form of Term Life Insurance. It is designed to provide a guaranteed level premium, and a guaranteed level of coverage for a stated number of years; usually 15, 20 or 30 years. At the end of your term, you are guaranteed the return of up to 100% of your premium payments if you are still living. Because it is a return of premium, the money returned to you is not subject to federal income taxes. The premium for this policy is higher than other forms of Term Life Insurance. However, it also offers the lowest cost over time, as up to 100% of your premium is returned to you at the end of your term.
Group Term (Employer Sponsored) – This is the most popular form of Term Life Insurance. It is offered as an employee/member benefit, and it is an easy process to sign up. However, your employer/union owns the policy, and you are a certificate holder. This means you do not control the policy, and in the vast majority of cases, you will lose this protection when your employment ends with the sponsoring employer. Generally, you are offered a small amount of free life insurance as a benefit of your employment without a health exam or questionnaire. If you elect to apply for more, you will need to pay the premium for the additional coverage and submit to a health questionnaire, and possibly a health exam.
Most group term policy premiums increase every 5 years based upon an age table. So, when you reach a certain age, such as 30 years old, your premium will increase. It will then increase again at age 35, and so forth. This is one of the more expensive types of Term Life Insurance, because life insurance companies must offer the base amount of protection to all employees within the group without considering health issues. So, they adjust their pricing accordingly.
In the article, “What Is Life Insurance?”, you learned that life insurance is a back-up plan. No one wants to use their back-up plan. However, if you have a back-up plan, at least your loved ones will be protected. Term Life Insurance provides an inexpensive option to create financial stability if your family ever suffers through, an otherwise, very unstable time.
I hope this short article has helped you better understand some of the more popular types of Term Life Insurance available to you. And that you are beginning to feel better equipped to make a purchasing decision that is right for you.