According to the 2010 U.S. Life Ownership Study by LIMRA (Life Insurance and Market Research Association) about a third of America’s adults have a group term life policy, and about a third has individual term insurance contracts. The study also revealed that ‘the average U.S. household with life insurance owns enough to replace 3.5 years of income…’ and that ’58 million U.S. households (50%) believe they do not have enough life insurance… and only 44 % of U.S. households have individual life insurance…’ Term life insurance policies are designed to provide at least three answers or solutions to common objectives. They typically offer lower cost life insurance options; they offer term specific periods to match the years of coverage requested; and it provides an option for those who believe they can ‘buy term and invest the difference’ at a better rate of return than insurers offer on other plans.
- LOW COST:
All other things constant, term policies are always initially less expense than Whole life Insurance or Universal Life Insurance. Depending on the insured’s age and health rating the premium on a term policy could be 10 times less than that of a permanent life policy. However, because the cost of term insurance is directly related to mortality cost (pure life insurance protection) and thus the age and health of the insured; in the cases of highly rated insureds or much older insureds, the cost of term insurance becomes much closer to that of permanent policies.
- INVESTMENT OPPORTUNITY:
Many Americans, especially younger and middle aged insureds, follow the ‘buy term and invest the difference’ concept that was put out during the 1980’s when short-term interest rates and T-bills were about 10 %. As certain professors at the American College teach, term insurance is ‘temporary insurance’ because one day due to age or cost it will end. So, though it is true that term insurance can cost much less than Permanent Life Insurance for as long as 15 to 30 years, the buyer who intends to invest the difference and use their accumulated earns minus taxes for a future benefit after their term plan ends should seriously take into account: the length of time of the desired coverage; the amount of desired current and future benefits; investment risks; market risks and returns; and the guaranteed premium costs of their plan choices.
- LEVEL PREMIUMS GUARANTEED FOR A PERIOD:
Term policies typically show two columns of premiums in their contracts; scheduled premiums and maximum or guaranteed premiums. The initial term period is usually a level period from 5 to 30 years; the guaranteed premium during that period is equal to the level scheduled premium. Most term policies are guaranteed renewable to a specific or ‘expiry’ age such as ‘the policy anniversary on which the Insured is age 90.’ It is important to compare different plans and even plans of different companies because premiums can greatly vary. For example, it is possible for a 5 Year Level Term product to cost less than a 15 Year Level Term product that is held for 12 years.
- CONVERSION BENEFITS:
Most term plans offer a conversion privilege until the policy reaches a certain number of year’s in-force or the insured reaches a certain age. The conversion option allows the policyowner to convert or exchange part or all of the term life insurance policy to a permanent life insurance policy. Also, insurers often offer conversion credits in the form of a partial refund of premiums as an incentive to purchase a new permanent policy. For more information see the article – Conversion Option.
Most life insurance policies have riders or additional available amendments to the standard policy contract. A rider is an amendment or endorsement to an insurance policy, which for an extra premium gives the policyowner extra benefits or options. Examples include children insurance riders, other cover insured, and waiver of premium.
- FOR MORE INFORMATION (see the following articles):
Term Insurance Riders – This link explains the additional benefits or optional ‘Riders’ available for most term life insurance plans.
Employer-Sponsored Group Term vs. Individual Term Life – This link explains and compares the differences in individually bought life insurance versus group term life insurance.
Mortgage Life Insurance vs. Mortgage Cancellation Insurance – This link explains and compares the differences in individually bought mortgage life insurance versus borrower-pay mortgage cancellation or credit life insurance plans.
Return of Premium Term Life (ROP) – This link addresses term life insurance plans that refund all of your premiums at the end of the term period.
Term Life vs. Permanent Life Insurance – This link explains and compares the differences in term life insurance versus permanent life insurance plans.
Advantages & Disadvantages of Term Life Insurance – This link addresses the most important advantages and disadvantages to term life insurance plans.