What Is Term Life Insurance And How It Works?
Term life insurance is maybe the most popular life insurance. How does it works? in which cases it’s the best chioce? Term life insurance — the basics!
What Is Term Life Insurance?
Term life is the simplest form of life insurance. It offers death protection, at a fixed rate, for a specified period of time.
The specified time the “term” ends, the policy will have to renew on an annual basis. The good news is that you can have up to the age of 95 to keep renewing your policy.
Term life insurance is often less expensive compared to other life insurance policies.
You may never see the benefit of this unless purchased at a younger age.
In a term life insurance policy, there is no cash value. Only death benefits protection. What normally happens, you can buy a policy covering you from the age 10 to 60 years. If you die within this period, say at the age of 59 years, your beneficiary gets a death benefit equal to the face value of the policy.
What if you don’t die?
The policy simply ends at that. Your beneficiary gets nothing and you too get nothing out of it. Its affordability makes it a good choice for some of the short-range goals you may be having. As you get older, the cost of term life policy goes up and your health declines. Therefore, there are people who will prefer long-term policies under the term life insurance:
On the one hand, it cost them more since it would mean that they have to purchase a series of increasingly expensive policies. on the other hand, this would help them maintain the coverage throughout their life.
When you hit the age of 65 years, most of the companies would find it difficult to provide a cover for you. It is an age where you are susceptible to many diseases. The cover basically would be so expensive.
Most of the policies will renew at an increased premium. There are some companies where the premium increase greatly.
If you were paying 60% in the policy, in the next renewal, you may find yourself paying an increase of over 180%. Meaning that the policy would be standing at 300%. Some other companies prefer to increase the premium by only a small percentage say from 10% to 18%.
There are still some other companies that choose to keep the rate the same way. However, the par value of the policy would be decreased. For instance, if at the start the par value was $10,000 after renewal, this may change to $ 9,000.
The Conversion Option Of Term Life Insurance
Imagine what if you wake up one month and everything is normal, in the next wake — the next month, everything just goes wild, the rate has been changed. You can’t take this anymore.
What can you do?
Insurance companies know that most policyholders would prefer something smooth. A policy with fewer hustles. Therefore, they decide it best to have a conversion option. This becomes the best option if you want to lock your maximum years instead of relying on a renewal option.
What is a conversion option?
Well, it is an option, a feature that allows term life policyholder to convert their policy into whole life policy or universal policy. Just as you speculated, the premium will increase! However, the rate class will be based on what you had originally qualified for in the term policy.
This brings along a basket of goodies folks, the new policy will not be based on your current health status. If term life policy becomes more of a hustle, you just need to convert it into universal policy and keep the insurance for the remainder of your life.
Return Of Premium Insurance
Do you need a life insurance protection but you are worried about never using for something you’ve paid for?
This is the policy to go for.
The policy works under the principle, protection now, money later! Usually, this is a rider added to the term policy. It works by making sure that the owner gets all the premiums paid back.
There may be the 20-year Return of Premium term life plan or the 30-year. The period depends on the company. The benefit of this is that it provides a solid life insurance protection. Take a look;
A healthy person takes 20-year Return of Premium at the age of 30. he pays $135 per month for the cover. At the end of 20 years, the amount would have accumulated to $32, 400.
At the end of the cover, the insurer would pay back the amount paid in premiums. It becomes an advantage for the people who want to make a saving plan out of the term life insurance.
The policy becomes less expensive for younger people. Statistically, a younger person is less likely to die, this is in the age bracket of 25–35 year. It is sensitive for people who older that is 65+. However, some companies would allow you to convert the policy to whole life policy.
When converting the policy, you do not have to specify the reason for a change
You still do not have to undergo any medical examination. Or what is called “Evidence of Insurability.” However, do not get ahead of yourself here. Even when a conversion is dubbed “permanent” there is some age limit where you cannot be covered. Convertible term life insurance offers the best policy for both the permanent and term life insurance.
The premium of the new converted policy will be based on your age at the time of conversion. For instance; you have purchased a $1,000,000, a 20-year term policy. At the time of purchase, you were 29 years. At the age of 39 years, you decide to convert $250,000. still, at the age of 49 years, you decide to convert another 250,000. The remaining $500,000, you decide it best for the cover to lapse. Based on your age, the premiums for each $250,000 you’ve converted would be different.