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Term Insurance Explained

Want to know how term insurance works? Want to find out which policy, term or permanent, is best for you?

Take a look at this page to learn about these policies.

What I want to do here is give you a basic and general outline of term life insurance policies as well as descriptions of how they are used.

I will also discuss the advantages of buying term policies as well as the disadvantages.

It is important that you know how these plans work.


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What Is Term Insurance?

This type of insurance can be described as basic life insurance without anything added. It provides a guaranteed death benefit for a specific period of time. Some term life policies have a guaranteed level death benefit.

This really means that it doesn't go up or down, it remains the same for as long as you own the policy.

These include the yearly renewable term life insurance policy, the 5 year guaranteed level term life policy, the 10 year guaranteed level term life insurance policy, the 15 year guaranteed level term policy, the 20 year guaranteed level term policy and the 30 year guaranteed level term life insurance policy.

Other term life policies may decrease over time (e.g the decreasing term policy) This policy is usually used as mortgage protection insurance.

The Advantages Of Term Life Insurance.

  • Not everyone has sufficient income to pay for permanent life insurance like whole life, universal life and variable life insurance. These people need to provide ample protection for their families or for a growing business.

    The best way to go is to buy cheap term insurance or a combination of term and permanent insurance.
  • Term life insurance would provide a lump sum payment upon your death which is usually free of income taxes or you may decide to have an income paid to your loved ones.
  • There is usually a conversion privilege built into this type of insurance. The policy may be converted to permanent life insurance during the policies lifetime.

    Some life insurance companies limit the period in which conversion may be effected. At the conversion point you do not need to do a medical examination. The company must convert the policy upon your request.

Disadvantages Of Term Life Insurance.

  • With the yearly renewable term policy the premium increases every year. If you keep it too long before converting it the premiums could become prohibitively expensive.

    If you should develop some sort of illness which would prevent you from getting new insurance you will be left with the high premiums to pay.
  • All term policies have a limited period of time for which you can keep them in force. There is no more insurance after the time period expires.
  • There are no cash values available to you if you should fall short and are unable to pay your premiums, neither is there any loan value.
  • Term insurance does not participate in dividends which are available to whole life policy owners if the life insurance company performs well.

Now that you have a basic understanding of the advantages and disadvantages of term insurance let us take a look at some of the plans and how they work.

  • 5 Year Term.

    You initially purchase this policy for a 5 year period and the death benefit remains level for the duration...so do the premiums. You buy 5 year term insurance to fulfill a short term life insurance need.
  • 10 Year Term.

    10 year term is a very good starter policy...especially for young married people. Because of it's low cost you can purchase a large policy without putting your pocket book under any strain.

    The intent is usually to convert the policy to permanent insurance when able. The death benefit as well as the premiums remain level for the duration.
  • 15 Year Term.

    The 15 year term insurance policy is very similar to the 10 year term policy but lasts an extra 5 years. It can also be used for family protection.
  • 20 Year Term.

    20 years seem to be a good period to plan for whether you are thinking about protection for the family or about business insurance. For that reason the 20 year term policy is very popular among life insurance buyers.

    The level premiums of this policy are usually quite affordable and the death benefit, which also remains level, can be paid either in a lump sum or in the form of an income.
  • 25 Year Term.

    The cheap 25 year term policy is quite attractive to young married couples as well as business people planning to protect their assets. This policy has a level death benefit and level premiums as well.
  • 30 Year Term.

    Whole life insurance whether in it's original form or modified form offers more safety than term insurance because the period for which you can keep it never expires.

    The 30 year term life insurance policy, though it expires in 30 years, gives the owner excellent coverage at a reasonably inexpensive cost for all of 30 years.

    As with most term policies if you think you will still need insurance after the 30 year period you have the option of converting the policy to a permanent policy within a specific "conversion period".
  • Yearly Renewable Term.

    This is simply a 1 year term policy which allows you the opportunity to keep the policy for each additional year at additional cost.
  • Decreasing Term.

    Decreasing term life insurance, though at times is used for other purposes, was specifically designed to pay off the balance owed on a mortgage upon the death of a homeowner. The premiums remain level and are quite affordable.

    The death benefit, however, decreases each year. The amount of coverage is always quite close to the balance owed. Upon death the decreasing term insurance policy provides sufficient cash to pay off the mortgage.

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