How does Term Life Insurance work?
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UPDATED: Oct 22, 2011
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Life insurance policies provide money to your family in the event of your death. While not everyone needs life insurance, individuals who are the main income in their household will probably want to take out a policy, especially if they have children at home. Life insurance can help to relieve the financial burden on a family following sudden or accidental death, and can also be used to off-set the costs of the funeral itself. Although there are several types of life insurance, most people will opt to use term life insurance due to its affordable cost.
How does Term Life insurance work?
Term life insurance is a policy taken out for a specific amount of time, such as 20years. Individuals pay premiums for the duration of the term, and if they die during any time within that term the whole amount of the policy is paid. For example, if someone takes out a 20-year term life insurance policy, but dies within a year, her family will still receive the same amount as someone who died at the end of his 20-year policy term. This feature is called a fixed death benefit, and is one reason why term life insurance is an excellent option for most people.
Term life insurance policies also have fixed premiums. That means that you will pay the same amount on your premium for the duration of the term, no matter what changes may occur in your life such as chronic disease. This can be extremely beneficial as individuals can sign up for a long term policy while they are young and healthy, and continue paying that rate through middle age when medical concerns start to become more prevalent.
What happens when my Term Life Insurance policy has ended?
When you have reached the end of your life insurance term, there are several options available to you:
Continue Coverage with a new premium
You can choose to continue paying monthly rates for coverage, although the rates will no longer be fixed. Premiums will usually be substantially higher in this situation than they were prior to the end of the insurance term. Continuing temporary coverage is not an option available to everyone; most insurance companies will require the insured to be at an advanced age.
Convert to a new Life Insurance Policy
Your company may offer you a conversion, which changes your term life policy to a permanent policy with a similar death benefit. For example, if your term life insurance guaranteed $20,000 to be paid to your spouse or children, the permanent policy will also pay $20,000. Conversion is not always available, however, and the terms might not always be agreeable. Premiums may increase dramatically, or the company may only allow a conversion within the first several years of your policy’s inception.
Opt for a New Policy
You can take out a new insurance policy. You will need to go through the application process again and submit to another physical, but if you are still in good health you have a very good chance of qualifying for a low-premium insurance policy.
Can I renew a Term Life Policy once the Term is over?
Renewal is a relatively rare option for term life insurance. A renewal will allow you to take out another, identical policy without any change in your health class or premium cost. This could be beneficial if your health has deteriorated since you first applied for insurance, but may not be a program your company offers.
What types of Term Life Insurance are available?
There are several different varieties of term life insurance that have unique benefits. For example, you might purchase a return of premium (ROP) policy, which reimburses all of your premiums to you at the end of the term; renewable term life insurance, which can be renewed indefinitely upon expiration; annual renewable life insurance, which lasts only one year at a time but can be renewed each year. There are also adjustable term life policies that allow you to amend the terms of your policy throughout the term, depending upon your needs.
When choosing a life insurance policy, be sure to weigh all of your needs and make a policy choice accordingly. An individual with several young children and a stay-at-home spouse will have different financial needs than a bachelor, for example, and will want to purchase a different life insurance. Whatever your needs, a term life insurance policy may be an affordable way to assure financial security for your loved ones in the event of your untimely death.
If you are looking to purchase life insurance, the best way to start is by searching for a quote online. Life insurance companies offer a wide variety of premiums based on several factors, so you can save money by comparing multiple companies online. Bear in mind when searching for premiums that the amount is only an estimate, however, and your final premium will be based upon the results of your medical history and physical exam.
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