The Basics of Term Life Insurance
Term Life Insurance
“Buy term and invest the rest." In other words, term insurance is less expensive than whole life insurance. So, the money you save can be invested elsewhere. Term insurance is usually the better choice for most people, but that depends on the wants and needs. We will discuss several subcategories of term insurance.
Understanding the Basics of Term Life Insurance
Term life insurance is having a set amount of insurance for a set amount of time. This Insurance can range from as low as 5 years to as much as 30. The average is between 10 - 20 years.
A premium (a monthly charge) is determined by the amount of coverage and the amount of time.
The amount of insurance you need is based on two factors:
Firstly, the loss of income from the insured that will impact the household. For example:
- the cost-of-living expenses
- any debts,
- burial/funeral, if the insured dies.
Secondly, is the debts that the surviving has to pay.
- The spouse shouldn’t have to relocate because they can’t pay the mortgage.
- Making car payments.
- Provide an education for their children.
- Pay off creditors.
How Term Life Premiums are Calculated
The premium amount is determined by which type of term insurance is purchased. Mainly, it depends on the client's needs, such as the amount of coverage, the length of the policy, gender, age, occupation, hobbies, driving record, family history and medications.
If you bought a 20-year policy then passed away prior to the 20-year termination date, the insurance will be paid out. On the other hand, if you out live the policy, it will terminate at the expiration date, and consequently nothing will be paid out.
In short, this insurance is best for those with minimal income or assets that do not want to financially burden loved ones. Similarly, if you are single with no children and you have assets when you die, your estate will go into probate. The first to be paid are debtors and attorneys, after that the family members' receive what is left.
9 types of term limit insurance products:
Level Term Insurance is the simplest of all life insurance. This premium is a set dollar amount purchased over a specific time period. Therefore, the younger you are, the lower the premium.
Adjustable Premium Term
This has features of both term and whole life, so that it earns interest and has a cash value. You can adjust your premiums, face amount, length of time, and coverages within reason.
As a result, this policy is best if you foresee several changes in your life during the policy period. To clarify, if you want some of the whole life features but can’t afford whole life, this might be an option for you.
Credit Term Insurance pays all your creditors when you die, so that your heirs can inherit your assets. In other words, if you had student loans or other debts, credit term insurance would pay creditors, leaving your assets to your beneficiaries.
Credit Term Insurance can be used if you become disabled or unemployed, or you can buy it to not burden co-signers on loans in case of death.
Credit Term Insurnace converts a term life insurance policy to a whole life insurance policy at a later date. When I was looking to buy insurance I wanted a whole life insurance policy, so I could leave an inheritance to my children with all the tax advantages. It wasn't affordable, so I paid for a convertible term. I bought a 20-year policy, so I could switch it to a whole life policy after ten years without having to requalify.
Decreasing Term death benefits decrease over time. In other words, if you purchased a 30 year $500k Decreasing Term insurance policy, it would look something like this:
The reason for purchasing this insurance is because your debts and expenses will decrease over the years.
Most importantly it's less expensive than Level Term.
However, the potential downside is guessing that your needs will decrease in the future.
Group Term Insurance can be bought and purchased at lower rates if you work for a large company, organization, or union. It is extremely beneficial for those that would not qualify, especially if you have preexisting medical conditions.
If your company, organization or union, offers this insurance look to see if there is enough coverage, if not, then you can always purchase more.
However, when buying group life insurance, make sure beneficiaries are attached to the insurance as well as in your will or trust. Some group life insurance plans do not directly state in the policy who the beneficiaries are, and consequently the beneficiaries will not get the insurance benefits.
Similarly, if you haven't heard of a Company Owned Insurance Policy, it is used to buy out a business partner if the partner passes away. It is also purchased by large corporations when a key employee dies.
This insurance is used to recruit a new person to replace them. It was known as “Dead Peasant Insurance" and began in Russia. The rich bought and sold peasants as property and they insured the peasants they bought.
Walmart had such a policy, and it wasn’t just for key employees. They 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.
It is the exact opposite of Decreasing Term. you would buy Decreasing Term if you were considering a home loan or other debts, expenses, and the cost of inflation over time. If the insurance is flat rate it could look like this:
Or it could be a percentage and not a flat rate. If it is a percentage, the table would look completely different. However, the potential downside is if you died sooner rather than later, you would be leaving less for loved ones. You would end up paying higher premiums for less coverage. This is the least sought-after insurance.
Renewable Term Insurance allows you to renew your policy each year without having to requalify. The premiums are higher and it is only allowed for a set number of years. As a result, it is best suited for younger people as a temporary solution.
This insurance will return the premiums to you if you outlive the policy. It is unfortunate that many life Insurance agents do not tell potential clients about this type of insurance. Before I became an insurance agent, I was unaware that this was an option. I would have been the perfect candidate for this type of insurance. I had concerns about paying into a policy knowing that I would likely outlive my policy and getting nothing in return for that purchase.
The cost would have been three times the amount. I paid $50 a month for my premium but I would have been paid over $30k at the end of the term.