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Term Life Insurance Definition
By | March 2, 2010
Types Of Term Life Insurance Policies Explained
1. Non-renewable/Non-convertible Term expires at the end of a stated period. It is cheaper than Renewal Term Insurance, but cheaper than Re-Entry Term.
2. Renewable Term – Policy can be renewed at the end of the period without evidence of insurability. The premium would go up due to age, but not because your health has deteriorated. A common type is “Annual Renewable Term” in which the premium goes up each year. Others are 5 Year, 10 Year, or 20 Year Renewable Term. In Renewable Premium Plans, premiums cannot be increased because of your health status, but only because of increased age.
3. Convertible Term (Term with conversion privilege) – Can be changed to a higher premium permanent policy (such as Whole Life, Endowment, ect.) any time with the premium based upon attained age. Conversion would raise the cost of the policy because you’re older and the permanent plan costs more. No part of the higher premium can be based on the Insured’s bad health at the time of conversion. You would buy Convertible Term if you wanted to start off with more insurance protection and later switch to a policy which builds Cash Value.
4. Re-Entry Term – The cheapest of all Term if the Insured qualifies. A type of Term you can purchase at lower premium cost (or what are called “select rates”). The Insured must “re-enter” or resubmit evidence of medical health, i.e. insurability. If the Insured is still in good health, Insured can keep the lower rates of the “select” mortality table. If the Insured is not in good health, Insured must continue paying the original premium schedule on the original policy.
5. Deposit Term – A ten year renewable Term Insurance Policy where a deposit is made at inception. If the policy is kept in force for ten years the insurance company pays the Insured the deposit plus interest.
Types of Term Life Insurance in Which Face Value Remains Constant or Changes
1. Level Term – Policy Face Value stays the same. Premium stays the same for the term of the policy. Policy is usually renewable at the option of the Insured. Level Term is more likely to have renewable features compared to Increasing or Decreasing Term.
2. Decreasing Term – Face Value goes down with time. Typically used to pay off mortgages (called Mortgage Life) and other loans (called Credit Life). Decreasing Term is also used to provide life insurance protection in case of expected decreasing financial resonsibility (kids leave home, ect.).
3. Increasing Term (sold only as a Rider) – Policy where Face Value goes up each year. Premium stays the same, so the insurer is charging a premium that is higher than required in the early years. Example of Increasing Term policies are the Return of Cash Value and Return of Premium riders, explained below.
Level Term, Decreasing Term and Increasing Term all last for a stated period only.
Similarity of Term and Endowment: Term Life resembles Endowment in that both provide limited period coverage and both pay the Face Value if the Insured dies with the policy in force. However, Term builds no Cash Value and hence it differs from Whole Life and Endowment.
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