Level term. Renewable term. Convertible term. Decreasing term. *scratches head* What the heck do these mean? Like most people, getting educated about different life insurance policies can be a real headache, but it’s definitely worth doing the homework.
The Basics – What exactly is term insurance?
Like the label indicates, “term” refers to temporary insurance since it only provides protection for a specified period of time. The only method of continual protection is to renew the policy. Term insurances have two main characteristics: 1) they have lower premiums since they only cover mortality and expense costs and 2) they do not build cash value. Each time a term policy is renewed, the company will do one of two things: 1) reduce the death benefit or 2) increase the premium. Why do they do this? Because each time you renew your policy, you become a higher risk to the company (In other words, death may be more imminent.) One may think that they’re evil, but the company has to make money to survive. Moving on…
Level Term
Level term is usually the least expensive form of individual insurance. Why is it called level? Because the death benefit remains the same; however, the premium increases each time the policy is renewed.
Decreasing Term
Decreasing term means that the death benefit will gradually be reduced in scheduled steps eventually reaching zero depending on the life of the contract. Each decrease usually occurs annually. Although the death benefit decreases, the premium usually remains the same. People usually get decreasing term to protect things such as mortgage or other types of liabilities that you eventually pay off.
Increasing Term
Opposite of a decreasing term, the death benefit increases in scheduled steps along with the premium payment. A common use of the increasing term is for those who feel that their income will gradually increase, thereby enabling them to afford a bigger death benefit with higher premiums.
Term Option #1: Renewability
“This option allows the insured to continue the same policy for an additional period of time, (the same as the initial period), before its termination date without having to prove evidence of insurability. The premiums for the renewal period will be higher than at the “original age” of issue to reflect the insured’s “attained age” and the insurer’s increased risk. “Original age” is defined as the insured’s age as shown in the insurance contract @ the time the policy is issued. “Attained age” is defined as any future age after the date of policy issuance.” – taken from the Life Agent Manual 12th Edition, Benchmark Education Corporation.
Term Option #2: Convertibility
“This option gives the insured the right to exchange the term policy for a permanent plan of insurance w/o evidence of insurability. The conversion premium is calculated @ either the insured’s current or “attained” age or based on the original age when the term policy was issued. This option allows the insured to purchase temporary insurance protection until permanent coverage is affordable.” – also taken from the Life Agent Manual
Conclusion: Is term insurance right for you? If so, which form suits you best? You must look @ your individual situation & ask yourself what your needs are before making a decision. Consult your financial advisor.
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