Life Insurance 101: Term Coverage


[This is part 3 of a 9-part series. For a full overview of topics, see the Life Insurance Basics page.]

Term coverage provides financial protection for an unexpected death of the insured. As discussed in Part 2, it's an economical way for young growing families to purchase a lot of coverage when they need it most. But, it's important to remember, that is temporary protection. The vast majority of term plans never pay a death benefit because most people outlive their term coverage or the premiums become prohibitively expensive at older ages and they drop the coverage.

Many employees receive term life insurance through their company's group life insurance plan. The coverage is typically a multiple of the employee's salary with two times salary being common. The employer usually pays the premium for this coverage which normally terminates when the employee leaves the company. Companies may continue to provide the coverage for their retirees. Group term coverage is very limited and most families need individual plans to provide adequate protection.

There are a variety of term plans available. Three of the most common plans are Decreasing Term, Level Term, and Renewable Term. Decreasing Term provides coverage which decreases over time while the premium stays level. It's usually the least expensive form of coverage. It's ideal for covering financial liabilities that decrease over time. Mortgage insurance is an example of this type of coverage. Level Term is probably the most popular form of term coverage. It provides a level death benefit for a level premium for a specified period. The premium is determined by the issue age of the insured and the period of coverage, for example 20-year term. Tobacco use and the health and lifestyle of the insured also affect the premium and are determined through the underwriting process. Underwriting will be discussed in a future chapter. Renewable Term provides a level death benefit for a premium that increases over time. The premium increases at predetermined intervals. For example, annual renewable term increases each year. This coverage can be very inexpensive in the early years, but often becomes very expensive when the insured is older and may need it the most.

Term coverage is pay-as-you-go, pure protection. Premiums are usually paid monthly, but quarterly, semi-annual, and annual options may be available. Companies may give a discount for paying annually. If a premium is not received on time, the coverage is terminated. A short "grace period" is provided for late payments. There is no cash value with a term policy, although there are a few new term plans that can provide a return (refund) of premiums at the end of the term of coverage. Return of Premium Plans have a higher premium than regular term plans. There is also an age limit past which companies will not issue a new term policy, typically late 70s to early 80s. At these ages, the premiums will be very expensive.

Term life insurance plans have very few "bells and whistles." They offer a death benefit for a simple premium. However, there are two features which may be important to look for: renewal and conversion. A renewal option allows the policy to be extended past the end of the original term with no proof of insurability (i.e. no medical exam or health questionnaire). A higher premium will normally be required for the renewal. This feature is valuable if the coverage is needed longer than originally anticipated. A conversion option allows the term coverage to be converted to another type of policy, such as permanent life insurance or a longer term plan. No proof of insurability is required for a conversion. However, most policies require that the conversion be executed prior to a specified date, such as no later than two years prior to the end of the term. This option is attractive for those who may not initially be able to afford a whole life policy, but would like to have permanent coverage in the future. There may be an additional small premium charged to add these two features.

For additional information on term life insurance visit the Life and Health Foundation for Education (LIFE) website. The next part in this series will take a closer look at permanent life insurance.

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