Term Life insurance

Term Life insurance

Term life insurance is a type of coverage that is temporary, as it covers only a preset amount of time usually a year or less.  After the preset coverage expires the insuree must obtain addition coverage or go without coverage. Because many people would prefer longer term health insurance, but are unable to afford the higher premiums, many term policies offer a conversion privilege, after a certain time, to exchange to a more permanent policy of Whole Life or Universal Life.   This way a person can obtain cheaper insurance then be able to convert to a lifetime policy once the insuree is financially able.  The cost of term insurance are downright cheap for young (less the 50) healthy people when compared to whole life, universal life and variable universal life coverage.

How Does Annual Renewable Life Insurance work?

A term life insurance premium is usually paid at a fixed rate for one year of coverage or annual renewable term (ART).  The policy is only guaranteed to cover the year paid for.  Where as permanent insurance offers coverage for the life of the insured as long as the premiums are current.   Term Life Insurance is more affordable to receive coverage because a shorter term means a lower likelihood of a healthy persons demise in that short period of time.  But as the policy holder gets older or the cost to insure you increase your short term premiums can increase as well.  A big disadvantage of ART if you develop a terminal illness within the term and need to renew the insurance company could consider you uninsurable.  This is the reason term insurance is able to be so inexpensive.

Level Term Insurance

Also available instead of  annual renewable term insurance is level term insurance.  Level term insurance is similar to Annual Renewable Insurance in that you agree to pay the annual renewable term in your contract yearly in order to continue to receive benefits.  But the the cost to renew is fixed for a given number of years.  Most commonly 10,15, 20, and 30 years.  The longer the contract usually the higher the cost as your risk increased.  And most policies guarantee reinsurability in the event you develop a terminal illness.  Many Level Term policies include conversion privileges if you decide to convert you coverage into a permanent life coverage.   Many level term insurance are now offering a return of premium  (ROP) advantage similar to permanent life polices.   ROP offers a return of your partial or full premiums if the insuree is still alive at the end of the contract term.  The cost for these plans are sometimes higher however.  ROP’s work by putting your paid premiums into an investment fund  designed to return some interest similar to many permanent life insurance plans.

Permanent Vs. Term

The biggest difference between permanent and term insurance is COST.  The main reason for this is term polices are finite and are more likely to end before you die.  While permanent polices exist until you leave this earth (as long as you continue to pay).  Few can afford permanent products and believe their money is better being saved in an emergency fund.  If this is the case term life insurance can help cover your life insurance needs.

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