When you are looking at buying life insurance there are two general categories for it. There are term life insurance and permanent life insurance policies (whole life and universal life). Permanent life insurance is pretty self-explanatory. These policies are permanent and cover you for your entire life. Nothing changes in these plans from the design that is put forth on the original policy. Term life insurance is a bit different and can have some different features, so let’s take a look at how it works.
The first thing to figure out is what they mean by ‘term’. A term life insurance plan is a policy that covers you for a set number of years. The coverage period will be divided up into ‘terms’ that are a fixed number of years when the premium will remain constant. As an example, if I am 35 and I buy a ten-year term insurance policy I actually get coverage until I am 85 years old. What happens is that every 10 years (the term length) the premium changes. I pay the same amount from age 35 to 45, then an increase occurs and I pay a level amount from age 45 -55. These renewals keep happening until I reach the age at the end of the coverage. The cost increases every ten years are actually listed in your original policy contract as well.
How do renewals work? Most term life insurance policies are issued as guaranteed renewable policies. What this means is that the original contract lays out the premiums for every year until coverage expires. If you pay the premium, the coverage remains in force. The insurer is guaranteed to renew the policy at that amount, regardless of any changes in your health or lifestyle. Keeping with the previous example, if I buy a policy while healthy at age 35 and then 9 years later I am diagnosed with cancer, I can keep the policy in place by paying the renewal premium. There are no health questions asked before the coverage for the next ten years kicks in. We highly recommend purchasing a term life insurance policy which is guaranteed renewable because it allows you the ability to keep your life insurance in force after the initial term comes due regardless of your health.
How do the terms work? They will usually be based on a number of years. You can find variations from 10 year terms to 40 year terms. The more often the policy renews, the lower the initial premium will be. This is because as you age, the risk associated with you dying increases. With shorter term periods you can reflect that increased risk by having the premium increase more often. Typically it makes sense to try and match the length of the term with what you are trying to cover with the policy. An example would be if you are purchasing term life insurance to cover your mortgage debt that you are planning on having for the next 20 years. We would recommend a 20 year term life insurance policy to cover this.
Finally, some term insurance policies may be ‘convertible’ as well. What this means is that the life insurance company guarantees to issue you a permanent life insurance policy with the same death benefit without any health questions or medical examination. This can be valuable as needs and your health change over your life.
Term life insurance is a key part of life insurance planning, just make sure you understand how it works and what you are going to see in the future to avoid any surprises. As always, we are here to help answer any questions that you may have.
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