Term insurance is basic life insurance, and the easiest type of policy to understand. A life insurance company will charge a dollar amount, known as the premium, to provide the beneficiary with a tax-free cash benefit if the insured dies within that term. A beneficiary might be a spouse, child, or anyone else the insured desires. If the insured does not die within the term, no cash benefit is paid. The premium paid to the insurance company was the cost of the death benefit protection for term the policy was in force, no refunds are made if the insured does not pass.Insurance companies want to ensure that the insured does not have any health problems. In particular, they are concerned about health problems that would increase the likelihood of paying the death benefit. Therefore, the company will ask the insured to be examined by a physician.
Term life insurance is designed to provide immediate financial resources for your family in the event of your premature death. You choose the amount of coverage you need and the length of the term. You may select 10, 15, 20, or 30 years of coverage and the amount of guaranteed benefits. Term life insurance is affordable protection, with clearly outlaid costs.
If you decide to continue your insurance beyond the selected term, you can continue to pay without additional medical exams. However, after the original term period is over, your premiums will be subject to annual adjustments. These adjustments typically result in large increases in premium costs.
A more common insurance is guaranteed level premium term life insurance. Here the premium remains the same for a given period of years. Cost is based on the sum of each year’s annual renewable term rates; the insurer makes a time value of money adjustment. The longer the term the premium is level for, the higher the premium.
Most level term programs include a renewal option and allow the insured to renew for a maximum guaranteed rate if the insured period needs to be extended. Renewal may or may not be guaranteed and the insured should review their contract to see if evidence of insurability is required to renew the policy. Typically this clause is invoked only if the health of the insured deteriorates significantly during the term, and poor health would prevent them from being able to provide proof of insurability.
Some term life policies include an option to convert the term life policy to a Universal Life or Whole Life policy. This option can be useful to a person who acquired the term life policy with a preferred rating class and later is diagnosed with a condition that would make it difficult to qualify for a new term policy. The new policy is issued at the rate class of the original term policy. Note that this right to convert may not extend to the end of the Term Life policy. It may extend a fixed number of years or to a specified age, such as convertible to age 70.
In most types of term insurance, including homeowners and auto insurance, if you haven’t had a claim under the policy by the time it expires, you get no refund of the premium. Your premium bought the protection that you had but didn’t need, and you’ve received fair value. Some term life insurance consumers have been unhappy at this outcome, so some insurers have created term life with a “return of premium” feature. The premiums for the insurance with this feature are often significantly higher than for policies without it, and they generally require that you keep the policy in force to its term or else you forfeit the return of premium benefit. Some policies will return the base premium but not the extra premium (for the return benefit), and others will return both.