Types Of Term Life Insurance Policies
With a permanent life insurance policy there are three main types of policies that are offered by life insurers, these are: whole life, variable life and universal life.
Each of these policies differ in how they treat the cash value reserve and also in the types of advantages or benefits they offer. This makes different policies suitable for different types of individuals, which means that careful consideration is needed in order to choose the most appropriate policy for your specific needs and requirements.
Term life insurance policies also offer the consumer a variety of different choices for the type of coverage that they take out, and just as you must carefully consider your options with a permanent policy, so must you do so with a term life policy.
What are my options?
In general, term life insurance policies vary depending on the length of coverage that they provide you with, whether or not you have the option to renew your policy or convert it to a permanent policy and the length of time that prices are guaranteed for.
In this article, we will look at some of the main types of term life insurance policies on offer and discuss the different options associated with each type of coverage.
This information should make it easier for you to decide which coverage plan to take out, although it is still recommended that you speak with your insurance agent or broker for advice, as they will be able tell you exactly what your options are based on your specific needs for a policy.
The three types of policies that we will be looking at are:
- Annual renewable term
- Fixed rate term
- Decreasing term
Annual Renewable Term Life Insurance
Annual renewable term life insurance is a “pay as you go” type of policy which involves you paying for a certain amount of coverage in advance. In this sense, it is similar to how you would pay for airtime in advance with a pay as you go cellular phone.
With an annual renewable plan you buy coverage for a 12 month period. At the end of that period, you then have the option to renew your coverage for another 12 month period.
With this type of coverage it is important to remember that because you will be exactly one year older when your coverage ends, if you choose to renew your coverage, then your mortality costs will increase as you are deemed to be at an increased risk of death due to your advancing age.
Your policy or expense costs however, will remain roughly the same, resulting in an overall net increase in the cost of your premiums. In other words, the older you get the more expensive it becomes to insure yourself each year.
Renewable Period
Most insurance companies will allow you to continue renewing your coverage until you are 70 years of age, although some insurers will take people up to 100 years of age.
However, there are also life insurers who will pose a limit on the number of times that you can renew your policy, rather than limiting you by age. So if you are interested in having this type of life insurance, then be sure to ask your insurer what their maximum renewable period allowance is.
Pricing
You will find that future prices are not normally guaranteed for more than 5-10 years. During this period, you can expect your premiums to rise slightly each year constrained by a guaranteed maximum price ceiling. Should at any time you wish to convert your annual renewable term life insurance policy to a permanent life insurance policy, you will have the option to do so without requiring medical examination.
Overall, this policy can be a good option if you are looking for very short term coverage, such as a few years, perhaps because you wish to cover a short-term loan or other short-term financial obligation so that your dependents would not be burdened with it if you were to die suddenly.
But because your costs will rise each year, this type of coverage is not really suitable to have for a prolonged period of time as eventually it does not become cost effective to maintain.
Fixed Rate Term Life Insurance
Unlike annual renewable term life insurance where costs rise each year, fixed rate level term life insurance provides you with a fixed rate for a guaranteed period of time.
Typically, prices can be fixed for 10, 20 or 30 year periods, thereby allowing you to know in advance exactly what your policy is going to cost you in the coming years. In this sense, a fixed rate policy is similar to a permanent policy, although it is not exactly the same as your costs will only be fixed for a certain period of time.
Because you are likely to stay with a fixed rate plan for longer than you would with an annual renewable coverage plan, you will generally find that you can get a much better deal with fixed rate policies because there are many different life insurance companies competing with each other to get you to sign up with them.
From Term To Permanent
After your term has expired you will be given the option to renew your coverage, or, if you wish, to covert it to a permanent life insurance policy. In most cases, you will be able to convert to a permanent policy without the requirement of a medical examination and regardless of your current state of health.
Depending on your age, it usually makes sense to convert to a permanent policy if you are looking at extending your term past 20 or 30 years, as in the long run, having a permanent coverage plan will work out cheaper and your dependents will also be guaranteed of receiving a death benefit regardless of when you die.
This is something that is worth remembering when taking out any type of term life insurance policy, as if you do not die within the specified term that you have been insured for, then your loved ones will not receive a death benefit.
A fixed rate policy therefore tends to be a good option if you are looking for long-term coverage, as measured in decades, and are also considering taking out a permanent policy once your term expires. This may be suitable for people who are looking to cover large long-term expenses such as a mortgage or wish to cover the period in which their children are in full-time education.
Types Of Fixed Rate Policies
There are two main types or categories of fixed rate level term life insurance policies that you can choose from:
i) Traditional
A traditional coverage plan will renew at the end of your first term for a period that is equal to your previous period. Although you will not have to undergo a medical examination to renew your coverage, the price of the new renewal will increase depending on your age.
If you plan on maintaining this type of coverage for decades, you can therefore expect the cost to remain insured to steadily increase with each renewal period. However, providing that your income also increases over time, this shouldn’t pose too much of a problem for you.
ii) Reentry
A reentry plan is similar to a traditional level term plan, except that your renewal billing at the end of your first term will be for your new attained age with rates that increase substantially each year. In order to qualify for a renewal, you must however prove that you are in good health and be able to qualify medically.
This type of life insurance tends to be one of the cheapest policies available, but if you are not in good health, it also has some of the highest renewal prices.
As a result, such policies tend to be best suited for providing short-term coverage, as due to the higher costs later on, this is not a policy that you want to maintain for a long period of time with the intention of converting into a permanent plan later on.
Decreasing Term Life Insurance
Decreasing term life insurance policies provide you with coverage that reduces annually. Your premiums however, are guaranteed to remain level throughout the duration of your term.
There are usually two types of decreasing term plans that are available to choose from, these are:
i) Level Decreasing Coverage
With this plan your coverage will decrease by a flat amount each year, such as 3% each year over the life of a 20 year term. As a policy owner, this gives you the advantage of knowing in advance how much your coverage is going to decrease by, which then allows you to prepare for that decreasing coverage by making other arrangements such as a long-term financial investment.
ii) Mortgage Decreasing Coverage
Mortgage decreasing coverage reduces coverage to match a home mortgage payoff. Your coverage will decrease slowly during the first few years and will continue to decrease as your policy ages. How quickly your coverage declines will depend on your mortgage interest rate and the length of your mortgage, although the rates that you pay will not change during the term that you are insured for.
One major disadvantage with this plan is that your life insurance coverage will be decreasing as your living expenses are rising. So if you have children for example, the cost of raising your children will increase each year as your coverage decreases. So if you were to die suddenly, then your family will have less money to support themselves with.
Another disadvantage is that you usually don’t have the option to renew when your term ends, which means that you will then have to spend time finding other coverage which will now cost you significantly more due to your older age.
Due to these factors, it is generally not recommended to take out a decreasing term life insurance policy as you can get much better coverage, and usually for lower cost, with a reentry level term plan.
