Term insurance is a type of life insurance policy that provides coverage for a certain period of time or a specified "term" of years. If the insured dies during the time period specified in the policy and the policy is active, or in force, a death benefit will be paid.
Understanding Term Insurance
There are various types of term insurance policies available. Many policies offer level premiums for the duration of the policy, such as ten, 20, or 30 years. These are often referred to as "level term" policies.
Convertible term life insurance allows a term insurance policy, which has a limited number of years before expiring, to convert into whole life or permanent insurance. The major benefit of convertible insurance is that the policyholder doesn't have to submit to a medical exam, nor are any health conditions considered when the term policy converts to permanent insurance.
Some policies allow you to increase the death benefit as time goes on. The premium increases as well, but it allows policyholders to pay lower premiums early on in life when they have a lot of bills and expenses. The increasing term prevents having to qualify for another policy at an older age to get the added benefit as would be the case with traditional term insurance.
Mortgage Term or Decreasing Term
A mortgage term or decreasing term policy is the opposite of the increasing term because the death benefit amount decreases over time. The goal is to match the decline of the term benefit to the reduction of the policyholder's outstanding mortgage. The idea behind this strategy is that you don't need as much life insurance if you have less mortgage debt. However, although the premiums are smaller than term insurance, the premium payments remain constant even as the benefit declines.
As each year passes, the term insurance is renewed but for a higher premium since the policyholder is a year older. The benefit to annual renewable term insurance is that the coverage is guaranteed to be approved each year. However, it may not be the most cost-effective for everyone due to the increased costs over time.