All About Term Life Insurance
Term life refers to insurance which provides a ‘pure’ or temporary protection. This type of life protection typically provides the maximum amount of life insurance coverage for any given level of capital outlay.
The insurance policy’s face amount is payable to the insured if they die during the specified term. For example, a 10 year term policy offers a specified term of 10 years. If the insured dies within that specified 10 year time frame, their listed beneficiaries would receive the death benefit proceeds.
Advantages of Term Life Insurance
There are several advantages to purchasing term life insurance coverage, including:
- The cost is typically less expensive than forms of whole life protection.
- The guaranteed renewable option offered by many insurance companies allows the insured to maintain life coverage without insurability at the end of their specified term.
- The death benefit proceeds can be utilized to pay off specific debts, such as a mortgage.
- Term life can be used in conjunction with whole life policies to provide a greater death benefit.
As with any form of life protection, there are both advantages and disadvantages which should be taken into consideration when determining the type of life insurance which is most suitable for an individual’s given financial needs and goals. In addition to the general type of life insurance coverage (term vs. whole life), the variations of that type as well as the death benefit must be chosen.
Level vs. Decreasing Term Life Insurance
There are two primary forms of term life insurance- level and decreasing.
Level- Level term is the most common form of term life insurance, providing a constant of fixed amount of death benefit coverage as long as the policy remains in force. Level term is characterized by a level death benefit and increasing premiums. While the premiums for any given term policy will remain constant throughout the specified term (i.e. 5 years, 10 years, 20 years), they will adjust according to one’s age at each renewable period. For example, if the insured party wishes to renew their 10 year term policy at the end of the term, the new premium will be based upon the insured’s age at that time and the term duration selected. The new premium will not remain the same upon renewal as the original 10 year term policy. One feature which many life insurance companies offer is the ability to renew their coverage for another renewable period without proving insurability.
Decreasing- Also referred to as non-level term, the coverage amount decreases on an annual basis while the premium remains level throughout the specified term. The most common purpose of this type of insurance is to provide funds at death for survivors to pay off a specific debt obligation (i.e. mortgage, boat loan, home equity loan, etc.). The premiums for decreasing term are typically lower than level term as the policy’s face amount decreases as the rate of $1,000 of coverage increases.
Term life insurance is one of many types of protection available today. As you determine which type of coverage is appropriate for your given situation, be sure to consider your current income and expenses, accumulated assets, survivor income needs and financial goals in order to make the best decision for your household.
In my understanding, term is better when it comes to affordability, but it does not build value over time. Term is probably best for younger families who need to keep expenses low, but whole is better for those who have additional cash on hand. Great, informative post.