Term Life Policies

Term life policies provide temporary protection for a specified number of years. The terms may be one year, five years, ten years, twenty years or thirty years. The policies will only pay benefits if the insured dies during the term. If the insured lives beyond the period of coverage, the policy will expire and no benefits will be paid to the insured. Shop and Compare multiple Life Insurance quotes for free.

Term insurance may be issued as renewable, renewable and convertible or nonrenewable. Nonrenewable term is temporary protection for a specific period of time. When the term ends, likewise, so does the coverage.

A renewable term policy is one that can be renewed at the end of the specified period of time for another term period without evidence of insurability. Although the policy premiums will be based on the insured's age at the time of renewal. For instance, a one year renewable is renewed each year and a five year renewable term is renewed each five years.

Term policies that are convertible allows the policyholder to convert the term policy without evidence of insurability. This means that the policyholder could convert the term policy upon renewal to a whole life policy. Most all term policies are issued as renewable and convertible.

Types of Term Policies

Level term simply provides a level premium and level death benefit for a specific number of years. If a person purchases a five year term with a face amount of 200,000 dollars, the face amount and premium will remain the same for five years.

Decreasing term is also issued for a specific number of years. The difference is that the face amount decreases gradually to zero as the policy term matures. Note, the annual premium will remain the same. Many people will purchase a decreasing term policy for a specific amount to cover an outstanding balance on a home mortgage.

Increasing term is generally not used as often as level or decreasing term. Increasing term is the exact opposite of decreasing term. The death benefit increases over the term of the policy, while the premiums remain level.

Advantages and Uses of Term Insurance

• As temporary protection... it is often used to help cover temporary needs. For example, decreasing term is frequently used to cover the financial obligation of a home mortgage.
• For flexibility... when life's circumstances change and there is a need for additional insurance for a specific time. For example, a husband has a small whole policy and becomes the father of twins.
• Cost factor...the cost of term insurance is low, it is often used by businesses or individuals who have a large need for insurance. The low cost factor makes it possible to purchase a much larger face value policy as compared to the cost of a whole life policy at the same face value.

Disadvantages of Term Insurance

• Renewable term...over a long period of time, renewable term becomes expensive. Initially, the premium is    low and then increases with each renewal, based on the age of the insured. Basically, a low premium at 30 becomes quite expensive at 50.
• Decreasing term...even though the premiums stay level, the level premium pays for less and less insurance protection.
• Temporary protection...another disadvantage of term insurance is its very nature. It is temporary protection. If the policy is not renewed or converted, the policyholder can be left without insurance coverage when it is most needed.
• Even if the policy is renewable, it generally is not renewable past the age of 65 or 70. If the policyholder has not invested properly or has no other savings, there is the danger of not being able to afford insurance protection at this age.

NOTE: Many financial advisers and insurance agents alike suggest that the individual buy at least ten times their annual income in a 20 to 30 year term policy. Take the difference between the premium for a term and whole life policy and invest the difference into a solid mutual fund. The return from the mutual fund at retirement and thereafter should be more than enough to cover ones needs.