Term Life Insurance
Maybe you have heard “buy term and invest the rest” For most people term is probably the better choice, but that depends on the wants and needs of the purchaser. There are different subcategories of term insurance.
Understanding the Basics of Term Life Insurance
Is a set amount of insurance for a set amount of time. The range of time for term insurance can be as low as 5 years to as many as 30. On average between 10 - 20 years.
The client determines the need based on income and family financial needs. The insured pays a premium (a monthly charge) based on the amount of coverage and amount of time.
The amount of insurance should be based on a loss of income from the insured to the household to cover the costs of living expenses, including any debts, plus burial/funeral, if the insured dies.
Debts should be based on the spouse’s needs.
- The mortgage, the spouse shouldn’t have to relocate because they can’t pay the mortgage. Many widows have had to sell their homes and lower their standard of living because there was no life insurance policy.
- Car payment. I can’t stress enough having enough insurance to pay all debts
- Provide an education for their children.
The premium is determined by which type of term insurance is purchased there are several as it depends on the needs of the client, the amount of coverage, the length of the policy, gender, age, occupation, hobbies, driving record, family history and medications.
If a 20-year policy is in purchased and the insured passes away prior to the 20-year termination date, the insurance is paid out. If the insured out lives the policy, it terminates at the expiration date, and nothing is paid out.
This insurance is most suitable for those with minimal assets that do not want to leave a financial burden for loved ones. This can include single people with no children. Who will pay for their burial/funeral expenses? It wouldn’t be fair to burden others with those expenses.
9 types of term limit insurance products:
- Level Term
It is the simplest straight forward of all life insurance. This premium is a set dollar amount purchased over a specific time period. The younger the insured the lower the premium.
- Adjustable Premium Term
This has features of both term and whole life, in that it earns interest and has a cash value. You can also adjust premiums, face amount, length of time, and coverages within reason.
A potential client may be interested in a policy like this if they foresee several changes in their lives during the policy period. If you want some of the whole life features but can’t afford whole life this might be an option.
- Credit Term
Creditors can go after assets before heirs get their fair share. Credit Term could be bought to cover a debt like a student loan, so assets could go to beneficiaries, and not be burdened by debt.
They are also used to not burden co-signers on loans if there was a death. It can also be used for disability and even unemployment.
- Convertible Term
It is used when someone wants a whole life insurance plan but can’t afford it. The insured would buy a convertible term insurance with the ability to convert to whole life in sometime in the future without having to requalify.
- Decreasing Term
Death benefits will decrease over time for example I have a half a million, level term policy. If I chose a Decreasing Term, it would look something like this:
|YEAR||DECREASING TERM BENEFIT||LEVEL TERM BENEFIT|
The reason someone would purchase this insurance might be because of a decrease in debt or expenses and the larger amount would not be needed.
Another reason is that Level Term costs more, but those with minimal means can purchase level term rather than not having coverage.
It might be a purchase for someone that is paying down their mortgage and doesn’t plan more expenses in the future.
The potential downside is guessing that your needs will decrease in the future.
- Group Term
If you are working for a large corporation or belong to a professional organization, life insurance is more readily available for those that wouldn’t qualify.
If you have preexisting medical conditions, a job with the government, large corporation, organization, or union. They could offer better benefits to protect yourself and your loved ones.
If you are employed by any of these groups mentioned, look to see if there is enough coverage. If not, then purchase additional.
Word of caution when purchasing group life insurance, make sure beneficiaries are attached to the insurance and have it also stated in your will or trust. Some group life insurance plans did not have it directly stated in policy or will/trust.
Another group coverage you may or may not have heard of Company Owned Insurance Policy. Used to buy out a business partner if the partner passes away. It is also used by large corporations when a key employee passes away.
This pays to recruit and train someone new to replace them. Originally it was known as “Dead Peasant Insurance “Sounds horrible, doesn’t it? It began in Russia when the rich bought and sold peasants as property. They insured the peasants they bought.
I once worked for Walmart when I learned they had such a policy, and it wasn’t just for key employees.
Walmart abused the system as did many other large corporations, paying for coverage on employees that no longer worked for them.
The Pension Protection Act changed that and now it is only for key employees that currently work for and have written consent.
- Increasing Term
It is the exact opposite of decreasing term. A person buying Increasing Term might be considering a home loan or other debts, expenses, and the cost of inflation over time. If it is a flat rate it could look like this:
|YEAR||DECREASING TERM BENEFIT||LEVEL TERM BENEFIT|
Or it could be a percentage and not a flat rate, in that case the table would look completely different. The potential downside is dying sooner than later and leaving less for loved ones. You would be payer higher premiums for less coverage. Increasing Term is the least sought after of term insurance.
- Renewable Term
It’s exactly how it sounds; it gives the insured the ability to renew their policy without having to requalify. There is a higher premium for this type of term insurance, it is renewed annually and is allowed for a set number of years. It is best for younger people as a temporary solution.
- Return-of-Premium Term
Prior to becoming an insurance agent, I was concerned about paying into a policy with the likelihood that I would outlive the policy and getting no return on the purchase.
Many life Insurance agents do not tell potential clients about the return of premium term insurance. This allows the insured a return of all his premiums if the insured outlived the policy.
It would have cost three times the amount, but I could have gotten back over $30k at the end of the term.