What is Term Life Insurance?
A life insurance policy which pays out the face value of the policy (death benefit), upon the death of the covered insured, assuming that they have a terminal illness or live less than a year.
Term policies are usually cheaper than other types of life insurance such as whole or universal. The premium is typically paid up front for 10, 20, or 30 years from date of issue and there is no cash value built up in the policy.
Term Life Insurance can be purchased by people who do not qualify for traditional whole life insurance because they do not meet age requirements, already have health problems, are smokers, etc. The policy is usually affordable because the premium is paid up front for a set number of years (10, 20 or 30) instead of waiting until the insurance company knows if you are going to live for two more years or ten.
Term Life Insurance has always been viewed as a good way for young people to save money on their life insurance policy premiums.
While some term life policies have been around since 1920, this type can now be purchased by people as young as 16 and can be purchased by unmarried couples under 21.
Because of the low cost of this type of life insurance, many companies also sell supplemental types of life insurance which double the death benefit in age brackets which are usually 15-30.
Term Life insurance is one of the only forms of life insurance that can be purchased for a low annual premium under a certain age bracket.
The cost, however, does increase as you approach retirement age. The annual premium for a 30-year term policy once the insured reaches the age of 65, will typically be 2%-3% higher than it was at 25 years of age. The good thing about this type of life insurance is that you only pay premiums until you turn 65 when the cash value can be cashed out or converted into a whole life insurance policy. You never need to re-pay any premium if you choose to convert to whole life.
The mortality tables used for the computation of policy rates are available in Appendix B, Table I, of Life Underwriter's Institute (LUI) Standard Reports. These mortality tables, based upon studies by Mercer and Company and other actuarial organizations, are used for the computation of the cash surrender value (CSV) at time of death for term policies.
In order to qualify for a term policy you must meet some basic requirements.
First you must be over age 21 or not married at age 21 (if you do not meet these requirements your policy will have a higher premium).
Next, you must have a written health form (a doctor's statement) of less than 5 years duration on file with your insurance company.
Another requirement is that you may not smoke or use any other tobacco products.
You must also have no documented medical conditions which would contribute to the risk of premature death.
Finally, you must be able to prove that you can afford the annual premiums and have a job and income sufficient to assure the payment of these premiums.
The cash value of most term life insurance policies begins on date of issue but some policies may begin upon issue under certain circumstances as specified in each policy.
A few policies have a fixed policy term of 30 years but the majority of life insurance policies are available for a given term (usually 10-30 or 20-40) or a period upon the issue by an insurance company.
In addition to the fixed term policies, some life policies are available as variable term (variable premium) where the premium is adjusted annually based on changes in interest rates.
Term Life Insurance is included in the general life insurance company sector, which includes All-Risk and Universal life insurers. While all life insurers are required by law to provide coverage for pre-existing health conditions, not every term life insurer offers coverage when and if you lose your job, or die suddenly from an illness.
In other words, the policies available to you and the premium costs may be different depending on where you live.
The term policy is usually sold in a term insurance contract, but a few may be sold as variable life insurance policies. These variable life policies are often offered to younger individuals that are relatively healthy. In addition to the policy itself, parents may buy life insurance on their children. Term insurance is designed for short-term use; it is not designed for long-term use. It typically does not pay out upon death of the insured if they have a pre-existing health condition (another type of coverage may be available).
Another type of life insurance policy that is available to young people is Whole Life Insurance, which can be purchased through an insurance agent or directly from the insurer. This policy lasts for a fixed term (usually 25 years or more) and pays out a death benefit upon the insured's death, assuming they have accumulated sufficient cash value.
The classic whole life (whole premium) insurance contract is usually written over the course of a few decades with an initial term of 30, 20 or 10 years. The annual premium is usually paid up front and there is no insurers opinion of when you will die as part of your application process.
Most whole life insurance companies also offer a monthly statement that updates the cash value (CSV) on a monthly basis. The cash value in as much as it earns an interest rate based on the Prime lending rate in effect at the time and remains invested in short-term certificates of deposit.
At some point, usually during the first 10 or 15 years of a whole life contract, a whole life policyholder is required to convert their policy into a fixed term life insurance policy with an insured death benefit. Otherwise, this Prime lending rate will not be available for investment.
Typically, you cannot pay off one type of insurance you are holding without converting it into another type of coverage.
The cash value is then converted at a fixed rate that is less than the current Prime lending rate.
Typically, the conversion rate will be somewhere between 80-90% of the cash value.
The insurance company uses this up front premium to pay off the remaining death benefit on your existing whole life policy and you are left with a fixed term policy for 30 or more years.
During this period of time, if you wanted to close your account down, you would receive no death benefit upon your death (if you had an accident, for example).
Conclusion:
Whole life insurance is generally not for the young and healthy. For a young person, this can be expensive. As an example, a 25-year-old single male could be paying around $1,500 annually for coverage with a $100,000 death benefit. For individual coverage or small scale business in the 1950s to early 1960s – this was affordable.
It is important to shop for health insurance policies that offer better terms and better options for the type of coverage you are looking for. Consider going with either term insurance or whole life insurance (whole premium).