Term Life Insurance
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Term Life Insurance
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Term Life Insurance By Diana Greshtchuk
Shopping for an adequate life insurance plan can be a daunting chore if you don’t know what you need and what options are available to you. Perhaps the most important issue when acquiring a life insurance plan is to make sure it is tailored to fit your needs, will help meet personal financial and estate planning goals, and to make sure it is affordable. This article will give you a basic overview of the different types of life insurance and the advantages and disadvantages of each. The whole point of life insurance is to insure against a premature death, because we cannot completely avoid it. As a side note, in no way does the author advocate one type of life insurance over another because there is no perfect plan. There is only the perfect plan for you. First off, there are two basic types of insurance: cash value and term. Cash value insurance plans take a portion of the premiums paid each period and put that portion towards the insurance premium, and the other portion of the payment accumulates into an investment account. This investment account can be borrowed against in most cash value plans. Normally, the funds in this investment account are invested in a variety of mutual funds and treated like an equity account. Term insurance is the simplest form of life insurance and, as a general rule, is the least expensive. Term insurance is pure insurance for a limited period (for a short term). The policy is purchased for a specified time period and the face value is payable only if the insured person dies during this period. The most common periods for term insurance are 5, 10, and 15 year policies. Under the short-term insurance section, there are a few types of term insurance: annual renewable term, level term, and decreasing term. Annual renewable term plans (ART’s) renew automatically at the end of each year. This type of insurance is inexpensive when purchased at a young age, however, premiums increase each year as you age. The death benefit remains the same, even though the premiums increase. Under a level term plan, premiums remain fixed for a specific period; payments don’t increase or decrease until that specific period is over. However, when that period is over, premiums can increase dramatically. Level term costs a bit more than annual renewable term at the beginning, but over the long-run is less expensive. A decreasing term plan works like an ART, but instead of having premiums increase and the death benefit remain constant each year, the premiums are held constant and the death benefit decreases each year. Each of these three types of term insurance has two forms: renewable and convertible. Renewable term insurance includes a contractual provision guaranteeing the insured the right to renew the policy for a limited number of additional periods, each usually the same length as the original period. This works well because the insured doesn’t need to show proof of insurability to renew (i.e. if one year a person was a non-smoker, and when that person renewed they were a smoker, they aren’t penalized or rejected for this change in health status). Convertible plans grant the insured the option to exchange the term contract for some type of permanent life insurance without having to provide evidence of insurability (see paragraph above for explanation of this). Usually the conversion must take place within a specified number of years from inception. There are definite advantages and disadvantages to term insurance. The advantages are that term insurance provides the greatest amount of protection for a given dollar outlay; it’s better suited for short-term needs; and it’s very affordable. One of the main disadvantages of term insurance is that no cash value is being accumulated with the payment of premiums. In other words, there is no investment account that collects funds like in cash value insurance plans, in which the investor can build equity and wealth. Also, usually, this type of insurance is misused to meet permanent needs, as it is a short-term plan. Nothing is paid if the insured survives the term period, which may dissuade the renewable or conversion of this insurance due to “sunk costs”. Perhaps most importantly, the later a term policy is purchased, the less cost benefit there is to the holder. If a 20 year old were to purchase a 10 year term plan, since the probability of a 20 year old surviving the term of the policy is pretty close to 100%, an insurance company will give a discount to younger term policy buyers. However, as we age, and say, a 70 year old were to purchase a 10 year policy, the policy would sell at a premium to this person. As we age, the probability of premature death increases, so the chance that insurance companies will have to pay will increase, thus giving the insurance policy an incentive to hike up the prices for older policy buyers. To find out which kind of insurance is right for you and your family, speak to a financial planner, investment advisor, estate planner, or life insurance agent.
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