TERM LIFE INSURANCE
I’m curious by nature, so I decided to look up the definition for Term Life Insurance. I wanted to see where people were being directed, when they too were making this same inquiry. To my surprise, what I found was a tonnn of links to ‘apply’ for term insurance. Hmmm… honestly, this was not what I was expecting. My first thought was that this shouldn’t be so difficult, quickly followed by; no wonder people are so turned off by life insurance when they can’t get a simple question answered. Ughhh…
The more I dug, I used a couple different variations such as, ‘definition of’ or ‘what is’ term life insurance. I would still get the same links wanting me to apply for a term policy; this was getting frustrating, even for me. I then decided to hone my search into the dictionary world (what a concept), and I came up across this definition from Oxford Dictionaries: term life in·sur·ance NOUN term life insurance (plural noun) life insurance that pays a benefit in the event of the death of the insured during a specified term. So does it really take searching in a dictionary to get a true, standard-across-the-board, generic response? Of course, if you searched specific financial sites, I’m sure you’d find a definition, but it may not be as simply put as the one I found in Oxford Dictionaries. And, I’m also confident these same sites would be happily pointing you towards the products they happen to be selling!
So, what does a ‘Specified Term’ actually mean you ask? Well, let’s first talk about the types of term policies that are out there. You can purchase anything from a Yearly Renewable Term (YRT) which has no specified term, is renewable annually, and all without having to show proof of insurability. This type of term policy will usually start off inexpensively — since it’s based on your attained age, it increases each and every year, and the premiums will soon become too cost prohibitive. This is also the reason the majority of insureds don’t maintain these policies long-term because the premiums become just too exurbanite. This is also the type of term policy that might resemble one of those ‘too good to be true’ scenarios because the premium starts out sooo low. What’s really important about any term policy you’re considering is to find out how exactly how long that annual premium is locked in for. The last thing you need is the unwanted surprise that it will be increasing far sooner than you thought. And, as my dad used to say, “The big print giveth, and the small print taketh away!” Point being, always read the fine print!
A Specified Term policy can be anything from five-year term policy, all the way up to a 30-year term, and even in five-year increments, dependent on age. The term-length means that your premium will not increase (once you’ve been approved) during the particular term-length that you’ve chosen. If you’re wondering what the approval process of life insurance entails, it’s based on a person’s age, health, family health history and life expectancy, as determined by the insurer. If it’s a larger policy, there are usually additional factors that will be considered to prove suitability and justification of the policy as well.
“I detest life insurance agents: they always argue that I shall someday die, which is not so.” – Stephen Butler Leacock (1869-1944), English-born Canadian teacher, political scientist, writer, and humorist.
If you purchased a five-year term policy, your premiums will be locked in, and will not increase for the length of your five-year term policy. The same applies if you purchased a 20-year term policy; once approved; your premiums are locked in, and won’t increase for 20-Years. The same goes for 30-years, etc. — you get the gist. When I mentioned that you can purchase a term in five-year increments, what that means is if you wanted to purchase a 15-year term, or a 25-year term policy, (it doesn’t have to be just 10, 20 or 30-year term-lengths) you could do so, since those are available options as well.
Because I feel like it’s worth mentioning, I’m going to take a little side-step here regarding the five-year term policies, and what I’ve experienced previously. The majority of these types of policies tend to be grouped with other individuals, making them part of what’s called a “Group Term Policy.” They also tend to be age-banded, which means the premiums increase every 5 years based on what your current ‘age-band’ is. So to give you an example, one age-band might be ages 55-59, and the next jump occurs at ages 60-64 and then again at ages 65-69. I think these types of policies can make sense for two reasons; the first being if you have a need for life insurance coverage, but only if the need is for short-term. The second reason is if you’re uninsurable and you’re unable to secure a life insurance policy based on your own health situation, and you realllly want to have some sort of life insurance in place. These types of policies can also cease at certain ages, though you’ve been diligently paying your premiums for years; I’ve seen some insurance carriers cover individuals up until the age of 85, whereas I’ve seen others cease coverage at age 70. Again, please be sure to read the fine print.
“You don’t buy life insurance because you are going to die, but because those you love are going to live.” – Unknown author
Some people may think, why would I want to have a term life insurance policy locked in for 30-years?! An example is this, consider they had a 30-year mortgage, and wanted the mortgage covered in the event of a premature death — then again, when isn’t death premature?! It’s certainly not out of the ordinary to secure a 30-year term policy, and have it allocated specifically for the mortgage – though the beneficiary may have other ideas! Another option may be to consider a Decreasing Term policy. What’s interesting with this type of policy is that the death benefit declines each year, which is a direct correlation to the declining mortgage balance that it’s tied to. Though, the mortgage is decreasing, the premiums will remain level during the duration of this policy.
What makes term insurance so appealing is that you can purchase a large death benefit, for very little money in comparison to what a permanent life insurance policy would cost. The reason is because term insurance is known as ‘pure life insurance’. This means there’s no cash accumulation within the policy, and the premiums you’ve paid into the policy are used to cover the cost of insurance. If you pass away within the term-length of your contract, and you’ve continued to pay the premiums without the policy lapsing, the insurance carrier will pay the death benefit out to the beneficiaries.
Term insurance is also usually renewable at its expiration, but please be aware that the new premiums will be based on the attained age, and will continue to increase each year thereafter. This is when the term policy becomes what’s called Annual Renewable Term (ART), and at some point, ALL term policies become ART if you keep it until the end of its term-length. If you pass away after the term policy has expired, and you didn’t maintain the new increased premiums, there is no payout to your beneficiaries.
One particular feature I personally think is an absolute must on any term policy is the Conversion Option provision, and it’s important to mention that not all insurance carriers offer this provision. What this does is allow you to ‘convert’ your term policy to a permanent individual life policy, without having to show proof of insurability. You can convert your entire policy to a permanent policy, or even do a partial conversion, and perhaps still being able maintain to maintain the term portion that you didn’t convert. I can’t speak highly enough of the Conversion Option, as I believe it can be a life-saver in the event you happen to become uninsurable, and are no longer able to secure a new policy once your term policy becomes Annual Renewable Term (ART). With this option, there is usually an age-certain that you must convert your policy by, or the provision is lost. From what I’ve seen, some insurance carriers will let you convert your policy before your 65th birthday, and others I’ve seen to the age of 70.
“Fun is like life insurance; the older you get, the more it costs.” – Kin Hubbard
Buying life insurance is a very personal decision, and one that needs to be reviewed as situations change. While some experts recommend that you buy only term insurance, it ultimately gets down to what works for you and your family. Term insurance may fit a need for a certain amount of time, but if you don’t fully understand the policy that you’ve purchased, the term-length or its provisions, it could ultimately be the most expensive life insurance you can buy. And the final take-away for those still balking at purchasing a life insurance policy – change your mindset and remember this, life insurance isn’t meant to benefit you; it’s meant to provide for those you’ve left behind.