Term life is one of the most affordable and straightforward ways to provide security for your family and loved ones.
Term Life is so affordable because it’s a pure insurance product. This means that unlike permanent insurance, it does not need to pay out a claim after your policy expires or is cancelled. Therefore the policies that do not pay out subsidize the policies that do. They also do not involve a cash value or investment product like permanent insurance does.
Term means you buy insurance for specified length of time, 5, 10, 20, or 30 years. Premiums are normally set at a fixed monthly, quarterly or annual price. After the term period expires the fixed rate is no longer guaranteed and will change. However, you are under no commitment to keep the policy so if rates go down you can replacement your policy at a lower rate. We recommend you make sure your policy has a guaranteed fixed rate clause to make sure your rates do not increase during the specified term length.
When your policy expires, you will hopefully no longer need insurance, or you renew and get another policy. The older you are the more expensive insurance gets, so its best to get the longest length you think you’ll need. Some term policies have a “conversion” clause and we recommend you have this. It allows you to convert to permanent insurance without undergoing another medical exam. If your health changes for the worse, you will still be entitled to the rate you had when you purchased the originally policy.
This is traditional term life insurance and the most common type of term insurance. It allows you to have a fixed rate for the entire policy length. It is “Guaranteed” to never go up. However, after the policy expires your rate can change dramatically and because you are older or your health changes, it can be much more expensive.
This type of policy is actually what it sounds like. You annually renew the policy at whatever the current rate is. This type of policy is usually the least expensive in the early years and exponentially more expensive in later years. We typically do not recommend these policies because future premiums are not guaranteed.
Life insurance carriers began offering this type of policy in the early 1990s. It allows a policyholder to recover all the premiums they paid for the policy if they are alive at the end of the term. This may sound like a no loss proposition, but it is not. You will need to assess your opportunity cost to assess if this is a good alternative for you and we can help you evaluate if this product is a suitable product for you.
As a person ages and they gain financial resources they theoretically need less and less insurance. This product gradually reduces the death benefit as time passes. We usually recommend our clients use another method using guaranteed level term to accomplish a similar result if needed.
A term conversion clause gives you the right to convert a term policy into a permanent policy without having to worry about your current health situation. Many policies that you get today have a conversion feature.
Converting from a term policy to a permanent policy will usually raise your premiums because, in general, permanent policies are more expensive. However, conversion to permanent insurance has added benefits that renewing a term policy does not.
Permanent policies are great for estate planning or when you still need insurance but are too old to purchase term insurance. The decision to convert should be based on your specific situation, however the longer you wait to convert the high your permanent premiums will be.
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