Fixed term life insurance explained


 Fixed term life insurance explained

Life insurance is one of those products that you should probably get, but not necessarily know anything about. A lot of people have life insurance, it's just never really explained to them what the product is and how it works. The sad thing is that a lot of people don't even know the basics when they're signing up for life insurance or when they're renewing their policy. Let's explore some fixed term life insurance basics.

Fixed term life insurance is a type of regular term life insurance that has a set end date when your policy will end and then no more payments will be made. Fixed term life is a policy that lasts for a set amount of time, like 5 or 10 years. Usually at this point the policy has paid out all the death benefits listed on the certificate and then there's nothing left to pay out. After this point, you can choose to cancel your policy or continue paying and renewing. Usually if you decide to continue paying it's for a reduced premium which is known as a "reduced paid up" amount.

The reason people choose fixed term life insurance instead of regular whole life insurance is because fixed term can be more affordable. Fixed term policies are usually less expensive because they don't last forever so there's less risk involved when underwriting the policy. Even with this reduced risk, fixed term life insurance is able to insure most of the population.

So how does it work?

You choose a policy for a set amount of time, and when that time is up your policy will either be cancelled or renewed. Usually the renewal is done at the same rate as the initial payment. You can choose to extend the end date or change it up if you like but you need to get new documentation from the insurance company so they can adjust your card accordingly. The whole process should take about 30-45 days from start to finish depending on how many people are underwriting the policy.

One thing I really like about fixed term life insurance is that it's fully renewable. Because the policy is usually for a set amount of time, there's no fallback period to be worried about. The renewals can even be for another set amount of time after that point if you don't like the total sum you're paying and want to change it around. I once renewed my 5 year policy twice in a row because with each renewal I wanted to get another 5 years at the rate I was currently getting from my original payment.

Over the years I've had a lot of customers who were like me, who prefer a shorter term and wanted to use their premium savings for something else in their retirement portfolios. In both cases, we renegotiated our payment and paid less over the duration of the policy to ensure we got the same coverage and got more time off our insurance. For example, my wife and I had a $100K fixed term policy for around 1 year that we got at an affordable premium rate because we were planning to switch to another company after that year. We then decided to make our payments smaller and get another 6 months coverage at a lower rate off of that initial payment savings. This allowed us to make up the extra premium we put into our account by buying a new car, getting a new puppy, and having some fun in the sun with our vacation.

There is no right or wrong way to do managed fixed term life insurance. I had one client who was paying $125 per month for 1 year coverage with an additional $25 bucks per month discount for each year of coverage over 10 years so he was paying $1250 per year. He chose not to renew because he wanted to get more time on his life insurance coverage and luckily he was able to negotiate a better rate from his company. I had another client who was paying $10,000 for 10 years of coverage but paid less over time by extending his end date.

I encourage everyone to have life insurance, just don't be afraid to do research on the product and shop around for the best rate. Fixed term life is a great way to get a flexible policy that you can adjust as needed. It's also great for people who want to pay off their mortgage quicker and need a down payment elsewhere. I'm not sure if people are aware of it or not, but you can also use fixed term life insurance as a way to build a portable cash fund for retirement.

Okay so now I was ready to talk about "Reduced paid up" life insurance and how it works. When you're underwriting your policy with an insurance company there's usually 2 options when determining how many payments you'll receive on your policy. The first option is "Reduced paid up" which means that the amount of coverage is less than what the premiums you paid will cover. This usually occurs when the premium rate is higher than the rate companies are able to pay out based on risk. So you'll be paying less but your coverage limits will be lower (see example below).

This is not necessarily a bad thing and it doesn't mean that you're getting ripped off. You might actually get more coverage by choosing reduced paid up. An example of this would be the difference between a $500,000 death benefit at $50K/year premium compared to a $100,000 death benefit with a $50K/year premium. They both have the same yearly amounts but one has more coverage because it's at a higher rate. Both policies have an underwriting guideline they must meet and the more coverage you get the higher that guideline will be. So the key is to shop around for a good rate and length of coverage.

The other option is "paid up" which means that the death benefit is larger than what your payments will be. This usually occurs when the premium rate is lower than the amount the company needs to pay out based on risk. So you'll be paying more but your coverage limits will be higher (see example below).

Again, this isn't bad because it's just a different way of doing business. You're allowed to shop around for rates instead of being stuck with one company forever.


Life insurance has some really great options to help you protect the people you love while also helping save for your future. I hope that this article has helped you understand fixed term and reduced paid up life insurance better. Don't be afraid to make a trip to your local agent if you're not comfortable with online or phone underwriting with your company. The staff is usually there to help answer any questions you might have and can point you in the right direction towards finding what's best for your needs. If you have any questions at all just post below, I'll do my best to answer them as soon as possible.

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