Types of Term Insurance
Life insurance policies can be broadly divided into two categories: term insurance and cash-value life insurance. Term insurance offers only short-term security, whereas cash-value life insurance includes a savings element and accrues cash values.
Term insurance has a number of fundamental features. First, the protection is only in place for a limited time—for example, 1, 5, 10, 20, or 30 years. The protection expires at the end of the time period if the policy is not renewed.
The majority of term insurance policies are renewable, meaning that they can be extended without providing proof of insurability.
Every time the policy is renewed, the premium goes up and is based on the insured’s actual age.
The majority of term insurance policies are also convertible, allowing for the exchange of the term policy for a cash-value policy without providing proof of insurability. There are two ways to convert a term insurance policy.
The premium charged under the attained-age method is determined by the insured’s attained age at the time of conversion. The premium charged under the original-age method is determined by the insured’s original age when the term insurance policy was initially bought.
Types of Term Insurance
Term-life insurance products come in a huge variety today. These are a few of them as below
■ Yearly renewable term
■ 5-, 10-, 15-, 20-, 25-, or 30-year term
■ Term to age 65
■ Decreasing term
■ Reentry term
■ Return of premium term insurance
Yearly renewable term insurance
It is issued for a year, and the policyholder may renew it for additional one-year terms up until a specified age without providing proof of insurability. Each time a premium is renewed, the price goes up with age. The majority of annual renewable term policies also permit conversion to a cash-value policy without a showing of insurability.
5-, 10-, 15-, 20-, 25-, or 30-year term
The length of a term insurance policy can be 5, 10, 15, 20, 25, or 30 years. While the term premiums are level, when the policy is renewed, the premiums go up.
Term to age 65
A term to age 65 policy offers coverage until age 65, after which it expires. The policy may be changed to a permanent insurance plan, but the conversion choice must be made before the policyholder turns 65.
Term insurance with a decreasing face amount is a type of term insurance where the face amount gradually decreases every year. However, the premium stays constant over the course of time. Some insurance policies have premiums that are set up to be paid in full a few years before the coverage expires. For instance, premium payments for a 20-year decreasing-term policy might be due for 17 years. By using this technique, you can avoid paying a sizable premium for relatively little insurance coverage near the end of the term period.
Reentry term is a type of term insurance where, if the insured can periodically provide sufficient proof of insurability, renewal premiums are based on specific (lower) mortality rates. Based on the mortality experience of recently insured lives, certain mortality rates are calculated. The insured must, however, consistently demonstrate that they are in good health and are still insurable in order to keep their place on the low-rate schedule. If the insured cannot offer sufficient proof of insurability, the rates are significantly raised.
Return of premium term insurance
If the insurance is still in effect at the end of the term, term insurance is a product that reimburses the premiums. 15, 20, 25, or 30 years is the norm for durations. If the insurance is not kept in force until the end of the period, the insurer may offer a partial refund. The amount reimbursed only includes base premiums; it excludes any additional or inferior premiums.
For example, one insurer only charges a $240 yearly premium for a 15-year, $500,000 term insurance policy issued to a preferred risk male, age 32, who does not smoke. The annual cost of a return of premium policy would be $985, or 310 percent more. The same company would provide protection worth more than $2 million for the same premium.