Life Insurance Q & A on Term Coverage
What Is Term Insurance and How Does It Work?
What is Term Life Insurance and How Does It Work?
Term life insurance, which is sometimes referred to as pure life insurance ensures a payment of a death benefit, if the policyholder dies within a specific period of time. If the agreed upon term period expires and the policyholder is still alive, then no death benefit is paid. Should the policyholder discontinue the policy (not pay the premiums) then the coverage will also expire, which would mean that no death benefit would be paid.
Who is term life most suited for? Young parents, who may be eligible for large amounts of coverage for a reasonably low cost. People seeking temporary life insurance as a placeholder until they are able to decide how much permanent coverage should be in place. The premiums you pay for the term life insurance are mainly based on the value of the policy, which is also known as the payout amount or the death benefit. Some factors that directly influence premiums;
- Age
- Health
- Gender
- Medical History
- Occupations and Hobbies
- Family History
- Driving Record
Most term life insurance policies expire before paying the death benefit, in fact, the stat is less than 2% of all death benefits out last year were from term life insurance policies. So the overall risk to the insurance company is lower than that of a permanent life insurance policy. However, if do you die during the agreed upon term of the insurance policy then the insurance company will pay the death benefit. This is also otherwise known as the face value of the policy to the beneficiaries of your policy. A beneficiary can be a person or an entity (trust or charity). Upon the death of the insured the benefit is paid as a non-taxable death benefit to the person(s) or non-entity named and it may be used by them for any purpose. With families the funds are usually available to help settle any outstanding consumer or health care debts, funeral costs, or even pay off a mortgage debt
One thing we stress to all policy holders is to make sure that you have informed your family or advisors about the term life insurance policy and who to contact in the case of your passing away, so they can access the death benefit available to them. A death benefit may remain unclaimed, if the beneficiaries do not have clear instructions on how to make a claim or who to contact to access the dollars available to them. Remember - if you die after the term insurance has already finished then there will be no payout for the beneficiaries. Term life policies have no value other than the guaranteed death benefit
Term life insurance comes in several flavors including convertible, increasing, mortgage and return of premium, each one of these types targets a specific need for potential customers:
CONVERTIBLE TERM allows the term insurance policy which typically has a limited number of years to be converted to a permanent life insurance before it expires. It does not require the policy holder to do a medical exam nor are any health conditions considered when the term policy is converted. A typical term life policy allows the insurance company to refuse to renew your coverage at the end of the policy's term or require a medical exam to continue the coverage.
INCREASING TERM allows the increase of death benefit as the time goes forward the premiums do increase with increasing the death benefit but it allows the insured party to pay lower premiums early in life when they have a lot of bills and expenses then increase it when they have a better financial standing the other benefit of an increased term is that the policyholder does not need to qualify for another policy at an older age to get a higher death benefit
MORTGAGE TERM which is sometimes referred to as the decreasing term is the exact opposite of the increasing term it's done in a way that the death benefit amount decreases over time this is to match the death benefit with the decrees of the policy holder's outstanding mortgage amount the idea is that you don't need as much life insurance if you have less mortgage debt but the word decreasing may deceive some people as the premiums are smaller than the normal term insurance but do remain constant over the entire term even as the death benefit declines
RETURN OF PREMIUM (ROP). If you live to the end of the term then the insurance company will pay you back all of the money you spent on the insurance. This sounds like a good deal, since we already explained that less than 2% of term policies pay-out a death benefit. However, there are a few warning signs to look at before deciding on this type of policy;
1) The premium tends to be much higher than in a standard term policy
2) If you decide to cancel the coverage before the end of the term, more than likely there will be no money refunded to you
3) There are very few companies that will write this type of insurance anymore, so getting comparison rates or options can be limiting.
Let's go over the main points we mentioned- Term insurance is a type of life insurance that provides coverage for a specific number of years. If the insured dies within that specified period, then a death benefit is paid to the policy beneficiary(s). If the policy term expires while you are still alive then no death benefit will not be paid. There are several types of term insurance policies that provide different benefits based on the different needs of potential policyholders.
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