Term Life Insurance Policies

Term Life Insurance is an affordable way to provide security for loved ones. Many insurance companies will describe term life insurance as protection for those that cannot afford permanent insurance. That's because by nature, term life insurance is usually guaranteed for "terms" or intervals such as 10, 20 or 30 years.

Features of Term Life Insurance

But insurance companies also like to downplay the value of term life insurance because it is the most efficient form of life insurance sold. These policies are not nearly as profitable to insurance companies when compared to whole life insurance and universal life insurance. That's because with a term life insurance policy, the only thing that the premium goes towards is the cost of the insurance itself - very efficient, indeed.

Term Insurance and Cash Benefits

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That means term insurance is designed only to offer you a one time benefit. Unlike whole life and universal life policies, term insurance does not have a cash value associated with the policy. The cash value is often guaranteed on many permanent insurance policies and the money is available for withdrawal. So if you had a policy with this feature, you could borrow the money to pay for such things as a down payment on a new home.

Life Insurance Payouts

Another reason that term life insurance is so inexpensive is the fact that most beneficiaries never receive a payout on the policy. Industry research indicates that only around 1% of all term life insurance policies ever pay a benefit.

This low benefit payout stems from the fact that most term life insurance policyholders are relatively healthy individuals that are looking for an insurance policy to protect the financial future of their families. Low payouts translate into relatively cheap premiums, which make term policies such an efficient way to buy life insurance.

Using Term Life Insurance to Supplement Permanent Life Insurance

Even if you've decided that you need the more costly features of universal and whole life policies, your portfolio still might benefit from a term life insurance policy. Since term insurance is so cost effective and can be purchased over short time intervals it can be used to supplement other insurance policies.

For example, at certain times your family obligations might be larger in terms of financial needs. A term life insurance policy is a good way to provide added security during those times of increased financial need. Since term policies are tied to a timeframe, you can purchase a policy that also matches the duration of the family need.

Risks of Term Insurance

The one true risk that term insurance carries with it is the fact that you might be uninsurable when the term coverage finally expires leaving you without life insurance. This can happen due to the onset of an illness or a medical condition that developed as you age.

Unfortunately, this might leave you without life insurance when you need it the most. Fortunately, some term life insurance policies automatically renew. Other term policies may offer a conversion feature that enables you to convert the term policy to permanent life insurance. If these features are important to you, make sure you speak to an agent and understand your options at the end of the policy's term.

Term Life Insurance Policies

If you're thinking about buying term life insurance or comparing policies, there are a couple of features worth considering before choosing a plan. One feature to consider is the difference between annual renewable term insurance and level term. A second feature has to do with what are called conversion privileges.

Annual Renewable Term Life Insurance

Annual renewable term, or ART, is the simplest form of term life insurance you can buy. With this type of policy you're covered for a term of exactly one year. Premiums are based on the cost to supply life insurance for the next 12 months and will very likely increase each year as the policyholder ages.

Annual renewable term life insurance is arguably the most efficient term policy you can buy because you're paying exactly what it costs to provide insurance for the next 12 months. However, as you age the likelihood of a benefit payout occurring rises and therefore premiums can be very expensive.

However, keep in mind that the purpose of life insurance is to protect your loved ones or those that depend on you from a financial hardship. At the advanced ages we're talking about most policyholders would agree that life insurance is no longer a necessity.

Level Term Policies

Level term policies are the most popular term life insurance sold today. As mentioned earlier, terms of 5, 10, 15, 20, 25 and 30 years can be purchased. And unlike annual renewal policies, the annual premiums are exactly the same for each year the policy is in effect. This feature makes this type of policy less efficient than annual renewable term.

For example, let's say that a 30 year old purchases a 30 year term life insurance policy. Since it's more expensive to provide life insurance for a 60 year old (30 years from now) the overall cost of insurance will be reflected in the insurance company's estimated expense. Therefore the policyholder will be overpaying the actual cost to provide insurance in the early years of the policy and underpaying later on.

If the policy is held for all 30 years, then the policyholder gets full benefit from these earlier overpayments. However, if for some reason they decide to cancel their policy, these early overpayments were excess profits to the insurance company. That is, they overpaid for their life insurance.

Conversion Privileges

Some insurance companies allow term life insurance policyholder to covert their policy into permanent life insurance. This conversion privilege usually applies to the early years of a term policy after which it expires.

The conversion feature is attractive to those individuals that are interested in purchasing permanent life insurance but cannot afford the higher premiums. So person with a relatively young family can provide the necessary financial protection and leverage the efficiency of a term policy early in life. Later on, as their family income grows, they can decide if they'd like to take advantage of the cash value features offered by permanent life policies.

Buying Life Insurance

All this information should tell you that you need to look at more than just the annual or monthly premium when searching for a term insurance policy. Most insurance agents will be happy to discuss your financial needs and the policy that best suites your situation. But don't be afraid to shop around, even term insurance policies offering identical features can vary significantly in cost.

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