Term Life Insurance is the lowest priced life insurance that is available to consumers. Unlike Whole Life Insurance, Term provides no Cash Value. This means that there are no funds building while you pay your insurance payments (premiums). Term is what is known as “pure” life insurance, with 100% of the premiums paid going toward the payment of your policy.
A Whole Life insurance policy will build a Cash Value because a portion of the premiums paid go toward the policy fund and the other portion go toward the payment of the insurance coverage.
Term life provides you with more Face Value coverage than other types of life insurance, for a “given” dollar premium.
There are five main types of Term Life insurance available, although there are other variables, such as Level Term, Decreasing Term and Increasing Term (The latter is only available as a “Rider”), we’ll just focus on these main five for right now.
#1. Deposit Term Insurance – This is a 10 year renewable policy where you will make a security deposit at the time of purchase. The insurance company will return the entire amount of the deposit, plus interest, as long as the policy is maintained for at least 10 years.
#2. Re-Entry Term Insurance – This is the least expensive type of Term. You can purchase Re-Entry at what are known as “select rates”, which are less expensive than standard rates. Each time the “Term” of the policy is up, you’ll need to submit proof that you’re still in good health in order to receive the select rates, which must be done by completing a physical exam. If you’re not still in good health, then you must continue to pay the amount (premium) on the original Term policy.
#3. Renewable Term Insurance – You may renew this type of policy at the end of the policy term without having to take a physical exam or provide proof that you are still insurable. You would still have regular increases in your premium amount as you grow older, but not because your health may be suffering. One common type of Renewable Term Life is called “Annual Renewable”. The premium on an Annual Renewable Term policy will automatically go up each year. Other types of Renewable Premium Plans include; Five Year, Ten Year and Twenty Year Renewable Term.
#4. Non-Convertible/Non-Renewable – This type of Term insurance will expire at the end of a given time. Example, 10-Year Term. It costs more than Re-Entry Term Insurance, but is less expensive than Renewable Term.
#5. Convertible Term Insurance – This type of Term has what is known as a “conversion” privilege. This means that you may convert this policy to a policy with a higher premium, such as Endowment or Whole Life. You can do this at any time that you wish and your new premium would be based upon your age at the time of the conversion. A reason for doing this would be so you may purchase a more “permanent” plan. Your health would not make difference in the premium costs at the time of the conversion.
An example reason for buying Convertible Term Life Insurance might be a young man or woman that buys a policy in order to take care of their final expenses and debts, just in case of the unexpected happening. When this young person grew older and married, then they may want to convert their Term policy into something with a long term Cash Value, while still maintaining the original Face Value of the policy. The only difference would be an increase in premium payments.