3.2 Term Life Insurance
Most people are familiar with term life insurance; it comes in various sizes and colors. Policy premiums are based on mortality and loading.
Mortality - The relative incidence of death within a group.
Loading - Amount added to net premiums to cover the company's operating expenses and contingencies.
The word "term" is defined as "the length of time that something lasts, with a fixed beginning and end" or, more simply, "time." Term insurance is meant to provide protection for a preset period of time, typically 1, 5, 10, or 20 years; or in terms of age, such as until the insured is 50, 60, or 70 years of age. It will pay benefits only if the insured dies during that designated time period (term); therefore, it is sometimes referred to as "temporary life insurance."
When an individual purchases a term life insurance policy, he chooses the duration of time he wants, which ultimately affects the cost. Since a shorter duration period poses a smaller risk to the insurance company, the costs will be less the shorter the policy period. This makes it an especially attractive option for people without too much cash who are in need of protection. Purchasing a permanent life insurance policy is financially unbeneficial if the insured foresees canceling the policy within ten years.
A drawback, however, is that term life insurance policies do not have any extra savings features like a permanent life policy's cash value and therefore the policyowner is not entitled to any compensation once the policy expires. The face amount of the policy is the amount of money that will be paid upon the death of the insured only.
However, the policyowner can take out loans using the death benefit as collateral throughout the life of the policy. As with permanent insurance, the death benefit will be decreased until the loan plus interest is repaid.
Some companies offer variations on the traditional term policy. A term life policy can be:
- level term,
- decreasing term, or
- increasing term.
First we'll talk about the premium payment structure involved in term life policies. Then we'll delve into the three different types of term insurance listed above.
Remember - There are no cash values in term insurance.
