What is Term Life Insurance?
Term life insurance is the most common type of insurance owned by Americans. It is purchased by both individuals and by companies in the form of “group term.” It is very inexpensive, with group term rates being as low as 30 cents per thousand, the cost being a tax deduction to the company. Individual Term life is also cheap. It is often possible for a 40 year old to purchase a term policy with a face value of 500,000 for less than $100 a month. $100,000 for a non-smoker in his or her mid twenties can be as low as $25.00 a month.
Regardless of the low cost, it is important to know what Term Life is and to be able to define the difference between Term and Whole Life. Term policies—especially those sold by mail—can leave an investor feeling like he has been deceived. The policies and the language are legal, but without an agent to explain the terms, (which are not standardized) it’s easy to think you have something you don’t have. On the other hand, a Term may be appropriate for you; an understanding of what it is along with some careful planning on your part will help you determine what type of policy is best.
A Term Policy
A term policy is a lot like buying car insurance. When you buy car insurance, you are paying a company to pay for the damage in the event of a car accident. While the company may give you some price breaks if you drive for a period of time without an accident, you don’t expect to reap any other benefit from owning the insurance.
Term life insurance is a policy based on a decision to have company pay the bill if you should die. Of course, the life insurance will only pay one time—upon your death, and the benefit goes to a beneficiary. Like the car insurance, you have no cash value or savings that you can borrow or cash in if you should drop the insurance.
The biggest difference between term life and other types of insurance is that Term life only covers you temporarily—usually 20 years. After that, the policy can be renewed, but the price can go up astronomically.
Be aware of the alternatives
While a term policy can meet a family need for a certain time period, its important to know at least a little about the alternatives. A whole life, for example, provides insurance for your entire lifetime. If you purchase a level premium whole life, neither your premium nor your benefit will ever change. The cost will be significantly higher, but the trade off is that you will have a policy that will never expire, never increase in premium and will be worth actual cash against which you could borrow in an emergency.
Understanding the language
Like any contractual product, life insurance companies choose their own language. The following definitions will help you recognize the offers that come in the mail—before you buy.
Guaranteed whole life: the key word is “guaranteed.” It means you will have a level (unchanging face value and an unchanging premium.)
Modified premium: the premium will change, sometimes in the very next year, sometimes every five years.
Level Term: The premium and face value will be unchanged during the defined period of the term.
Graded benefit: The policy has a waiting period (usually two years) during which it will only pay partial benefits. This type of policy is usually whole life with a level premium, although there are exceptions. It is designed for a person whose health would disqualify him/her from purchasing a standard policy.
Renewable: All term policies are “renewable” after the initial term expires. The policy may say “renewable to age 90,” for example. Your premium will increase dramatically after the initial period, and the policy will expire completely at age 90, leaving you with nothing.
Note: some policies exist that combine several of the limitations mentioned above. For example, one company sells a “modified premium, graded benefit, renewable to age 90.” Such a policy would have regular increases in premium right from the start, limited benefit for the first two years, and would expire completely at age 90.
In conclusion, the best piece of advice we can give is to use our system to obtain quotes that fit your budget, but then sit down with a licensed agent to be sure you get a policy that will satisfy your needs for the rest of your life.
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