Benefits and downsides of term life insurance
The most popular subclass in life insurance is term life insurance where the coverage lasts for a specific number of years. This is also called pure insurance since the premiums are being paid for protection in the event of death only. It is called term life insurance because it provides fixed rate coverage for a limited time period or the relevant term. Once that period ends, the premiums may change and the client needs to either give up the coverage or change the conditions and obtain further coverage. Most people opt for this type of life insurance since the rates are lower than with whole life insurance, however, there are three important factors to consider – face amount, premium to be paid and term (period of coverage).
These factors can be combined in many ways, which means that the face amount can decrease or remain the same; the term can last one year only or be prolonged to several years and the premiums can be fixed or go up. Therefore, term insurance can be divided into three main subclasses which are level insurance, annual renewable insurance and mortgage insurance.
Level insurance implies a fixed premium that lasts more than a year. The terms here can last 5, 10, 15, 20, 25, 30 or 35 years. This subclass can be budget friendly since it allows the premium to remain constant over the entire period of time. Depending on the agreement, once that period expires, the policy can contain conversion or renewal option. When there is a guaranteed renewal integrated into the agreement, the insurer vouches that it will issue another policy (of equal or lesser value) whether or not the person is insurable. If there is no such agreement, the insurer can request a proof of insurability before renewing the policy. That means that these types of contracts have a conversion option and the policy can become a permanent one but with a possibility of rates being increased.
Annual renewable term is a policy that lasts for one year only but with the agreement that the insurance policy of equal or lesser value will be issued and the premium will be adjusted to the age of the applicant. This may be very practical and many people find this the most beneficial option.
Mortgage life insurance implies that the face amount can decrease. This means that the face sum will be equivalent to the amount of mortgage on the property of the policy owner. In the event of the applicant’s death, the outstanding amount of mortgage will be paid by the insurance company. Needless to say that this category of insurance is extremely useful and tempting for the people burdened with mortgages.
It is interesting to mention that the original idea was to exclude the suicide from all the contracts and beneficiaries would usually not be entitled to any compensation. However, in the later days, the insurance companies’ policy is to simply return the money paid without any further benefits. This is of course if the suicide happens within a certain period of time.