Not all Term Insurance policies are created equal; here's why.
Not all Term Insurance is equal
Term insurance typically comes in two main forms: level term and decreasing term. Level term provides a fixed death benefit and premium for the entire duration of the policy, while decreasing term offers a death benefit that decreases over time, often used to cover debts like a mortgage.
Let's look at more details of each type:
Level Term:
Level term life insurance is a policy that offers a consistent death benefit throughout the policy's duration. Your beneficiaries will receive the same amount whether you pass away in the third year or in the final year of your policy. It can also be referred to as level benefit term life insurance, which highlights the unchanging nature of the death benefit in the policy.
Level term life sometimes refers to a policy with a premium that remains unchanged throughout its term. This is actually a level premium term life insurance policy, but it’s often simply referred to as "level term life insurance."
The two options generally go hand in hand: a level life insurance death benefit with level premium payments. Most of the "normal" term policies available today are some flavor of level term life, but it’s important to clarify which product you want when speaking with a life insurance agent or shopping online.
Fixed Death Benefit:
The amount paid to beneficiaries upon death remains unchanged throughout the policy term.
Fixed Premiums:
The cost of the policy remains consistent for the duration of the coverage.
Common Term Lengths:
Typically offered in 10, 20, or 30-year terms, some companies offer longer or shorter periods.
2. Decreasing Term:
Decreasing term life insurance features a decreasing death benefit, meaning your coverage reduces over time, ideally aligning with a decreasing need for coverage. Mortgage life insurance exemplifies this type of policy, although not all forms of decreasing term insurance are directly linked to the amount owed on your mortgage.
Decreasing term life insurance is usually less expensive than level term life insurance because the payout decreases.
Decreasing Death Benefit:
The amount paid to beneficiaries reduces over time, often corresponding to the declining balance of a debt such as a mortgage.
Fixed Premiums (Often Lower):
The premium may be lower than a level term due to the decreasing payout.
Suitable for Addressing Specific Debts: Often used to cover debts that diminish as they are paid off
3. Increasing Term:
Increasing term life insurance policies provide a death benefit that grows over time, typically to keep pace with inflation or rising living costs. This contrasts with traditional term policies, where the payout remains fixed. Increasing term insurance can be an excellent option for those with growing financial responsibilities or anyone looking to protect their loved ones from the decreasing purchasing power caused by inflation.
Increasing Death Benefit:
The coverage amount increases over time, which may help address rising costs or financial needs.
Higher Premiums:
Premiums are usually higher than level term because of the increasing payout.
2024 Average Cost of 20-Year Term Insurance for Females
4. Renewable Term:
Renewable term insurance is a type of life insurance policy that allows the policyholder to extend their coverage for additional periods without needing to requalify for new coverage, typically without a medical exam. This feature depends on current premium payments and a renewal premium being paid.
Option to Renew:
The policy may be renewed for another term, even if the insured's health has changed.
Potential Premium Increase:
Premiums may rise upon policy renewal, particularly as the insured ages.
5. Convertible Term:
Convertible term life insurance is a type of term life insurance policy that allows you to switch to a permanent life insurance policy, such as whole life insurance, without needing to undergo another medical exam or demonstrate renewed insurability. This flexibility is a key feature, offering the benefit of temporary, lower-cost coverage with the option for long-term financial protection later on.
Ability to Convert:
The policy can be converted into a permanent life insurance policy, usually with a higher premium and cash value.
6. Fixed Term:
Fixed-term insurance, in the context of life insurance, is a type of term life insurance that provides coverage for a specific, predefined period, such as 10, 20, or 30 years.
7. Laddering Term Insurance:
If you want a more automated approach to coverage reduction, you could "ladder" your term insurance policies instead. With laddering, you stack term policies to reach the total coverage you need. This lowers your overall premiums since shorter policies are often cheaper.
At the beginning of your coverage, you might have three term policies that total $500,000. One of these policies lasts five years with a $100,000 "face value" — face value is the amount of money your policy is worth. The second policy has a life insurance face value of $300,000 and lasts 10 years. The final policy is for $100,000 and lasts 20 years, when your mortgage will be paid off.
Because your policies will expire at different times, this laddering system provides you with automatic reductions in coverage as your needs diminish. As you cancel policies, your total premium paid will decrease as well.
2024 Average Cost of 20-Year Term Insurance for Males
7. Term Exchange Programs:
A few insurance companies will convert your term policy to a permanent one when your existing insurance company will not. You may be eligible to exchange your term policy for high-quality permanent life insurance coverage with no underwriting.
It's important to note that premiums are linked to your health. If you lock in a 20-year rate with your current medical history but aim to become healthier over the next few years, you could end up paying a level — but inflated — price for all 20 years. In this case, you might be better off getting an annually renewable policy for a shorter period of time. Once you’ve settled into a healthier lifestyle, you can then reapply for a level term policy. Some insurers allow you to apply for a lower rate on an existing policy if your health has improved. For example, smokers may be able to apply for a rate reconsideration in the third year of coverage if they haven’t smoked for at least one year.
In conclusion, not all Term Life Insurance policies are the same. Choose wisely; saving a few dollars on the premium may restrict you from adding needed features later on. If your Term Insurance needs price sensitivity and family financial security, such as a Death Benefit, be sure to shop for Convertible Term Insurance. This feature is crucial because it locks in your insurability, allowing you to convert the policy to permanent life insurance. Please reach out to me today and let me show you how you can secure your insurability now with affordable Term Insurance that can be converted at a later date.