Term Life Insurance
Posted in Life Insurance
January 22nd, 2009
Also sometimes called pure insurance or temporary insurance, term life insurance is a contract for a specified amount of time (10 or 20 years, for example) that offers benefits in the eventuality of a specified event, usually death.
A term life policy is purely used as risk protection. Like auto insurance or a homeowner policy, it will satisfy claims in the event of an accident or other uncertain event, as long as the policy is in effect and premiums are current. If coverage is discontinued, the insurance premium will not be refunded.
Term Life Insurance Affordability
Term life insurance is perhaps the simplest and most affordable life insurance option if you are looking for a policy that is suited to short-range goals: for example, until your children are out of college, or until a mortgage is paid off. Since you can purchase large amounts of term insurance coverage for a relatively low premium, it is a good option to ensure risk protection for a specified amount of time.
Renewing Term Life Insurance
One drawback of this life insurance plan is that when the term expires, some plans may require proof of insurability for renewal. If, for example, the insured acquires a critical illness before the plan expires, the purchaser would be deemed uninsurable after the expiration of the initial term, and would be unable to renew the policy or purchase a new one.
Some policies overcome this issue by including a feature called guaranteed reinsurability, which allows the insured to renew their term life policy with no medical exam.
Both term insurance and permanent insurance use the same mortality tables for calculating the cost of insurance; however, the premium rate is substantially different for both types of life insurance. This is because term insurance is likely to expire without paying out, but permanent insurance must always pay out eventually. To address this, permanent programs must build in a cash accumulation component, which reinvests the premiums to allow the policy to self-insure.
The low likelihood of payout is what makes term life insurance a relatively cheap life insurance option.
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