Term Life Insurance

Term life insurance is typically purchased by people who are seeking life insurance coverage for a specific period of time; people who would like life insurance even with budget restraints or business owners looking for coverage in the event of a loss of a key employee.

This type of life insurance provides coverage for a specific period of time at a fixed rate payment, payable over the term of the policy.  Upon expiry, the previous rate for the insurance coverage is not guaranteed and is subject to new payment terms and other conditions.  If the policyholder dies during the term of the policy, the death benefit is paid out to the beneficiary (person named on the policy).  Term life insurance is one of the least expensive methods of buying life insurance to provide a substantial death benefit for a term.

Term life insurance is mainly used as an income replacement for an individual in the event of a death.  It is not typically used for estate planning or charitable giving.  Take a one year term for example; the death benefit would only be paid out to the beneficiary if the insured died within that year.  If the insured died one day after term expired, no benefit would be paid.  The cost of the premium is based on the probability of the insured dying within that one-year term.

One of the biggest risks with a term life insurance policy is once the term expires.  You could acquire an illness within the term, making it more difficult to get insured after the policy expired.  A permanent life insurance, such as a whole or universal life insurance, will provide coverage for a lifetime versus a specific term.  Some policies however, offer a feature that guarantees re-insurability, allowing the insured to renew with proof of health or any other requirements.

Types of Term Life Insurance

There are a variety of terms available with term life insurance products.  The most common terms are five-year term insurance, 10-year term insurance, 20-year term insurance, and 30-year term insurance policies.

Identify how long you anticipate keeping the insurance policy and purchase the term that reflects accordingly.  For example, a young family in their late twenties with young children who is seeking insurance to look after their children and cover off any outstanding mortgage costs; a 30-year term life insurance may be a good option.

Renewable and Convertible Term Life Insurance

There are two types of term life insurance often available:  renewable and convertible term life insurance.  The renewability and conversion are the two distinguishing features.

Renewable term life insurance policies automatically renew at the end of the term. For a 20-year term life insurance, the insurance would automatically renew in year 21 for another 20 years.  The renewal may be subject to higher premiums.  Many policyholders choose to shop around for life insurance quotes at the time of renewal, as the premiums are much higher than the last term (due to age factors).

Conversion term life insurance is a very important feature with current policies. Convertible term life insurance allows policyholders to swap their term policy for a permanent policy, up to a certain age.  This option is a must-have, as you will not typically require a medical exam and you will be provided coverage.  You never know what can happen down the road and if you developed an illness, this will be your best option to ensure protection for your family and not worry about the policy term expiring.