Term insurance is the most straight-forward and least expensive type of life insurance
One of the main things to remember about term insurance is that it is only active for a set period of time – the term. Available term lengths are from 1 year to 30 years. Terms are usually available in increments of 5 years (5, 10, 15, etc.). At the end of a classic term policy, if no benefit is paid out, the policy ends.
If a policy is not renewable, the insured can apply for a new policy once the current one ends. In this scenario, the premiums on the new policy are usually much higher than they originally were. With non-renewable policies, the health of the insured is assessed at the time of each new application.
Renewable policies. At the end of the term, a renewable policy can continue for a new term (sometimes multiple additional terms). The premiums are then adjusted based on the insured’s age at the time of the renewal – despite any changes to the insured’s health since the start of the policy.
Convertible policies. A convertible policy can be exchanged for a permanent policy by the policy owner. A policy cannot be both renewable and convertible but there is one main similarity between the two. When converting a term policy, any changes in the insured’s health are not taken into account. The new policy is typically issued assuming the risk classification from the original policy.
Simply put, term policies do not accrue a cash value.
Premiums on term policies are commonly level and stay the same for the life of the policy. However, in some cases, the premium can increase or decrease.
Increasing and Decreasing Death Benefit
While majority of term policies have a level death benefit for the life of the policy, there are policies available wherein the death benefit slowly decreases or increases throughout the term.
Decreasing Term. On a decreasing term policy, the death benefit slowly decreases throughout the term typically either monthly or annually at a pre-determined rate. However, the premium stays level. This type of policy is commonly utilized to cover the remaining amount owed on a loan by matching the amortization schedule. If the insured dies, the death benefit will cover the remainder of what is owed.
Increasing Term. On an increasing term policy, the death benefit slowly increases over the term at a pre-determined rate. The premium increases as the death benefit increases. While this type of policy is less common, it can be helpful for people who don’t need a lot of coverage now but know they will need more in a few years. These policies also help protect the death benefit against inflation.