Learning about the differences in term life insurance types can help you make the best decision on how to protect your family’s financial future. All temporary life insurance policies pay a death benefit to your beneficiary if you die within the term. But how the policy is issued, the length of coverage, how the cost is calculated, how the death benefit is paid out, and what happens when the term ends depends on the type of plan you have.
Differences in How the Policy is Issued
Life insurance policies can be issued in one of two ways: simplified issue or fully underwritten. Simplified issue means no physical exam or lab work is necessary. All that’s required is answering a few questions about your health. With a fully underwritten policy, you must complete a medical exam and lab work before your policy can be issued. The benefit in doing this is you usually get a lower premium if your results show good health.
Differences in Premium
A premium is how much it costs for an insurance policy. The overall premium for a life policy is typically calculated as the cost for a full year of coverage. With term insurance, the policy can renew every year, which changes your premium, or the premium can remain the same for the length of the term. This is called an annual renewable term or a level premium term, respectively.
Level Premium Term
Nearly all term insurance available to individual consumers are level premium term policies. This type of policy is usually offered in sets of five, such as 5, 10, 15, 20, 25, or 30 years. The 20-year level premium term plan is the most popular, according to the Insurance Information Institute. Level is another way of saying ‘flat rate’. So with this type of temporary life insurance, the premium rate is designed to be the same for a specific period of time. This can be a guaranteed flat rate for the entire policy term or only for the first few years. For example, if you have a 10-year policy with an annual premium of $300, only the first five years may be guaranteed at that rate. You should check with your insurance agent to find out how long the level premium term is guaranteed to last before purchasing a policy.
Since a life policy often cost more the older you get, the compromise with level premium term insurance is that you pay more upfront to cover the higher cost of coverage later in life. So it would be best to keep the policy active for the entire term in order to take advantage of the lower premium rate later on. Overall, the rates on term insurance are at an all-time low—so getting this type of term coverage is still affordable. For example, a healthy 35-year-old male with a 20-year level term policy worth $500,000 would pay about $430 a year, according to CNN Money. This works out to about $36 per month.
Annual Renewable Term
This type of insurance is far less common when compared to other term life insurance types. Most insurance companies don’t offer these policies because they provide families with the least insurance protection. In most cases, annual renewable term policies are provided through state insurance departments for business life insurance needs. They are sometimes provided through employee benefit plans.
With this plan, coverage is provided one year at a time. For every year you renew, the premium increases as you age. With this in mind, these policies may be best if used for very short-term needs—since it could become expensive to renew year after year the older you get. If you choose to renew annually for several years, insurance companies that sell these plans usually offer guaranteed annual renewable term from 10 to 30 years, according to Investopedia.
Differences in Death Benefit Payout
The primary purpose of term insurance is to pay a death benefit to your beneficiary if you die while your policy is still active. When you first enroll in a plan, you select the death benefit amount that you estimate could replace the loss of your income for a certain number of years. The type of death benefit payout that most insurance companies provide to individual consumers is level term coverage. This means that the death benefit stays the same for entire policy.
A death benefit payout can also increase or decrease over the term of the life insurance policy. This is called increasing term coverage and decreasing term coverage. Policies that provide an increase in death benefit are typically available through group insurance plans, such as those that an employer would provide. Oftentimes, decreasing term coverage is provided through lending institutions like banks and credit unions to go along with the types of products they sell. A life insurance agent will likely not be able to offer an increasing or decreasing term plan to an individual consumer.
Differences in What Happens When the Term Expires
A term policy can do one of three things when the term expires: end permanently (or lapse), renew automatically, or convert to a permanent policy. Two of these term life insurance types have age restrictions on the length of renewal you can get and when you can convert the policy.
Lapse in Policy
If you choose to not renew your policy and then later try to reinstate the policy, you might need to provide evidence of your current health by taking a medical exam or answering health questions. Insurance companies usually will reinstate a policy within five years of the lapse date, according to the Texas Department of Insurance. However, you might have to pay any past due premiums that you owe plus interests.
If your coverage is set to renew automatically, you would not need to provide evidence of your health—your premium payment is what continues the policy. Auto renewal can apply to any term policy, whether it’s a 1, 5, 10, 15, or 20-year term. According to the Texas Department of Insurance, most insurance companies only issue term coverage up to age 70 or 80—so you may be limited in how long you can set the policy to renew. For example, if you have a 20-year plan that ends when you’re 65, you may not be able to renew for another 20-year term because you will be 85-years-old when the term ends.
Policy Converts to Permanent Insurance
According to Investopedia, most term plans have a feature to convert to permanent insurance despite changes in your health. Your health is evaluated during your term period, so you don’t need to provide further evidence when you switch to a permanent life insurance policy. However, converting from term to permanent coverage usually needs to be done before you turn 65, according to the Texas Department of Insurance.
In most instances, you can exchange the value of your term policy for the same value in a permanent policy. For example, if your term plan is valued at $200,000, you can convert this to a permanent policy of the same value. Being able to convert from a term to a permanent life plan can be beneficial because:
- You get to take advantage of more affordable rates with a term plan while you’re younger and healthier, then get a permanent policy that builds cash value you can use in your retirement years
- You get insurance that could cover you for life, even if you wouldn’t be able to qualify for a new policy because of your health
Now that you understand more about what term insurance is and the differences in term life insurance types, let’s do a quick overview of how term life insurance policy plans could help your family:
- Helps replace the loss of your income to sustain your family’s financial needs
- Offers the most coverage you could get at an affordable rate during the child raising years
- Offers financial protection to cover major expenses like a mortgage with longer term plans
- Helps cover short-term debts like a car loan or medical bills
To learn more about how a death benefit payout from a term life policy could help your loved ones, contact a HealthMarkets insurance agent near you.