Types of Term Insurance Explained
Types of Term Insurance Explained
Anything can happen to anyone at any time, which is why it’s best to be prepared. This is where a term insurance plan comes into the picture. Term life insurance is a type of insurance policy that provides coverage for a certain period of time. It offers financial security if something unexpected happens to you during the specified “term.”
Although term insurance is cheaper than permanent life insurance, it doesn’t provide lifetime coverage. You are only insured as long as payments are made.
When it comes to choosing a term insurance plan, there's no one-size-fits-all answer. You'll need to find a policy that will match your unique needs. There are different types of term plans that you can include in your financial portfolio. Let’s delve deeper into this topic:
How Term Insurance Plan Works
Insurance can be puzzling for some people. If you can’t fully understand how insurance works, term insurance is probably the simplest type out there. It has a straightforward structure in terms of coverage and premiums.
As a pure life insurance product, it provides a guaranteed death benefit for a specific term, such as 10, 20, or 30 years. Throughout the policy term, premiums need to be paid. Premiums for term insurance are typically fixed and will never go up.
If the insured dies while the policy is in effect, a lump sum payout will be given to the beneficiary. But if the policy expires, the insured may renew the term policy or convert it to permanent insurance.
Pros of Term Insurance Plan
- Lower premiums than whole life insurance
- Convertible to whole or universal life insurance
- Insurance riders can be added
- Simple and easy to understand
- No investment component or cash value accumulation
- Premiums are fixed during the term
- Higher coverage amounts
- Cash benefits can be used to pay off the mortgage and other expenses
- Easy to customize
Most Common Types of Term Insurance
Level Term Insurance
The basic form of term insurance is called a level term plan. It has a fixed monthly premium and death benefit throughout the policy term. Rates won’t increase as you age or potentially develop health conditions. In case something happens to the insured, the death benefit will be paid automatically to the beneficiary. This plan is perfect for those looking for simple and straightforward policies.
Annual Renewable Term Insurance
A yearly renewable term is a policy that can be renewed each year. This term insurance guarantees that your coverage can be renewed without the need for evidence of insurability (EOI). With an annual renewable term, premiums are locked in for a year. However, the insurance rates will increase annually. Due to higher costs over time, it is only recommended for people who need short-term coverage.
Decreasing Term Insurance
This type of term insurance starts with a high face amount that decreases in one-year increments. Although the death benefit gets smaller over time, the policyholder pays fixed premiums. Decreasing term policies are cheaper due to the shrinking death benefit. In case the insured dies, the death benefit payout can be used for asset protection and mortgage payments.
Return of Premium Term Insurance
If you outlive the policy term, a return of premium insurance will return all premiums paid in a lump sum. This means you can receive a refund of all your accumulated premiums. This is only applicable if you haven’t made a claim on the policy. If the insured dies during the policy term, the beneficiaries can claim the death benefit, just like the usual term insurance policy.
Because of the return of premium benefit, this term plan is significantly more expensive than a standard policy. Speak with an insurance agent about the benefits and trade-offs of the return of premium riders.
Convertible Term Insurance
The next option is called convertible term, which can be converted into whole life or universal life insurance. With convertible insurance, you can get lifelong coverage without taking a medical exam again. Conversion of your existing policy is only valid before the term ends, so make sure to do this within your policy’s conversion period.
Looking for Term Insurance?
To start your insurance shopping journey, count on none other than Local Retirement Group. We can look for the best insurance plan that can protect you and your family. Our insurance agents are with you every step of the way. Give us a call today!
