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Term life insurance provides death benefit protection for a period of one or more years. The death benefit of the policy is paid only if the insured dies during that period. If the insured lives beyond the term period, no death benefit is paid. Typically, there are no cash values or loan values for term life insurance.
Term insurance is generally used when the need for death benefit protection is temporary or if you are unable to afford the premiums of a permanent life insurance policy. Term insurance typically provides for the largest immediate death benefit amount for each premium dollar. It is appropriate if you are seeking protection for a specific need that will end at a future date such as to pay for a child’s college education expenses, to repay a loan or to replace income should death occur prior to retirement.
Permanent life insurance is intended to provide protection for your entire life. Generally, the premiums for permanent insurance are higher at least initially than for the same amount of term insurance. A portion of the permanent life insurance premium is used to build-up a cash value in the policy. The cash value can be used in a number of different ways including allowing you to take out a loan against the cash value. Term insurance, as described in question one, provides protection only for a specified period of time and typically does not build up any cash value.
In general, there are three main types of term insurance available:
Level term insurance
The amount of death benefit protection you purchase will remain the same for the entire term period. The premiums you pay for this level amount of death benefit may also be level for the entire period, may be level only for a specified period, or may increase over time.
Decreasing term insurance
The amount of the death benefit protection you purchase will decrease over the term period. Premiums for a decreasing term policy usually remain level throughout the term period. Decreasing term insurance is generally purchased by those who have financial obligations that decrease over time such as a mortgage or a personal or a business loan.
Annual renewable term insurance
The amount of the death benefit protection you purchase will remain the same for the term period. The premiums you will pay for this level amount of insurance will increase each year.
Many term life insurance policies are described as being “renewable”. This feature allows the policy to be renewed for another term period without having to show that the insured is in good health. As long as you pay the premium due, the policy will automatically renew for another term period subject to a maximum age limit. The premium due upon renewal will most likely be higher than the premium you paid for the initial term period.
In most cases, term policies in New York currently cannot be renewed beyond age 80.
Some term life insurance policies are described as being “convertible”. A conversion provision allows the owner of the term life policy to convert from the term life insurance policy to a permanent life insurance policy during a specified period of time without having to show that the insured is in good health. The conversion period is shorter than the duration of the term insurance coverage.
How long coverage under a term policy will continue will depend on the type of and duration of the term policy you purchase. For example, if you purchase an annual renewable term policy your coverage may be renewed each year up to a specified maximum age limit. If you purchase a 10 year level term policy you will have coverage for 10 years. If you purchase a 10 year renewable level term policy you will have coverage for 10 years and then have the right to renew your term coverage for another 10 years.
Whether or not your premiums remain level for the entire term period or increase over time will depend on the type of term policy you purchase. Premiums for a term policy may be either level or increasing. Premiums can also be guaranteed in the policy to remain level for a specified period of time and may increase thereafter. In general, for most term policies the premiums will increase over time.
Some term policies provide for what is known as “indeterminate” premiums. This means that the policy will set forth a schedule of maximum guaranteed premiums. The insurer can never charge more than the maximum premiums in your policy. However, the insurer intends to charge you what is know as the “current” premiums which are less than the guaranteed maximum premiums in your policy. Ask to see both sets of rates before you make a purchase.
Term insurance is very competitive with respect to premium rates. Shop around and compare.
A term life policy will stay in force as long as you continue to pay the premiums due. If you miss a premium due date you will have a 31 day grace period to pay the premium due. Your policy will remain in force during the grace period.
An individual term life policy can be canceled by the insurer only for non-payment of premium. If you do not pay the overdue premium payment within the grace period your term policy will terminate. The policy cannot be canceled due to a change in your health status.
If you purchase term insurance through a group such as an employer-employee group your term coverage may terminate when you are no longer an eligible member of that group e.g. your employment ends. Be sure to read the termination provision of your group term life certificate.
A “Return of Premium” feature is a feature that has recently become popular and may be offered in conjunction with term life insurance coverage. The return of premium feature will generally provide for a refund of all or some of the premiums you paid for the term insurance at the end of a level term period or at end of the term coverage period if no death benefit was paid out during that period. The parameters of the return of premium feature will vary depending on the term life insurance policy you purchase. The return of premium feature can be offered by a separate rider to the term life policy for an additional cost. The return of premium feature may also be a provision within the term life policy. Term life policies with this feature will be more expensive than a term life policy that does not offer this feature. You should consider whether the return of premium benefit is worth the extra cost.
Most companies offer a variety of premium modes including annual, semi-annual, quarterly or monthly. In deciding which premium mode to choose you should consider the following:
If you choose to pay an annual premium and then decide to terminate your policy before the end of the year, the insurer is not required to refund any portion of the premium paid.
Generally, there is a higher cost associated with more frequent premium modes. Ask your agent or the company for a comparison of the different premium modes and the costs associated with each before making your purchase.