Temporary Life Insurance Polices
Convertible Term Insurance
By definition, term insurance is designed to terminate after a set period of time. However, some term policies may contain an option allowing the policyowner to convert the temporary protection to permanent protection. The option to convert must be included in the contract when the policy is purchased and depending on the insurance company, may specify a time limit for converting, such as 3 years prior to expiration or before age 55. Policies containing the option to convert are named accordingly and are easy to identify. For example, a term policy that provides life insurance protection for 15 years and also has a conversion privilege is called a 15-year convertible term policy. The option to convert gives the insured the right to convert or exchange the term policy for a whole life (or permanent) policy without evidence of insurability, In other words, the insured is not required to pass a medical exam or demonstrate good health since that requirement was already satisfied before the policy was originally issued. For example, suppose Steve purchased a 15-year term policy and suffers a massive heart attack 10 years into the policy term. Steve's heart attack negatively impacted his insurability. Due to his increased health risk, it is unlikely that an insurance company will allow him to purchase a life insurance policy.When his 15-year policy expires, he will be without life insurance and possibly unable to obtain life insurance. If Steve purchased a 15-year convertible term policy, he would have the option to convert the policy to permanent protection without having to prove insurability. Depending on the conversion method, the premium rate for the new whole life policy will reflect the insured's age at either the time of the conversion (the attained age method) or at the time when the original term policy was taken out (the original age method). The cost of insurance is the most important factor to consider when determining whether to convert term insurance at the insured's original age or the insured's attained age. When the attained age is used, the owner is terminating the pure protection and simply purchasing a new whole life policy without providing any health history information. The insured's age is one of the larges premiums factors and as such, this method results in higher premiums. Even so, most conversions are accomplished in this manner.
Decreasing Term Insurance.
Decreasing term policies are characterized by benefit amounts that decrease gradually over the term of protection and have level premiums. A 20-year $50,000 decreasing term policy, for instance, will pay a death benefit of $50,000 at the beginning of the policy term. That amount gradually declines over the 20-year term and reaches $0 at the end of the term. Decreasing term insurance commonly used to protect pay off debt in the event of the insured's death. Mortgage Redemption Insurance is a type of decreasing-term life insurance policy. Its purpose to provide policyholders a way to have their mortgages paid off if they die before it is fully paid. This prevents the full burden of paying the mortgage from falling on the surviving family members' shoulders. With this design, the face value decreases as the balance remaining on the mortgage decreases. Credit Life Insurance is limited benefit (term) policy designed to cover the life of a debtor and pay the amount due on a loan if the debtor dies before the loan is repaid. The beneficiary of such a policy is usually the lender. The type of insurance used is decreasing term, with the term matched to the length of the loan period (though usually limited to 10 years or less) and the decreasing insurance amount matched to the outstanding loan balance. Credit life is sometimes issued to individuals as single policies, but most often it is sold to a bank or other lending institution as group insurance that covers all of the institution's borrowers. The cost of group credit life (or any credit life for that matter) insurance usually is paid entirely by the borrower. While credit life or mortgage insurance may be required as a condition of a loan, the creditor cannot require it to be purchased from the organization granting the loan or a specific organization
Increasing Term Insurance
Increasing term insurance term insurance that provides a death benefit that increases at periodic intervals over the policy's term. The amount of increase is usually stated as specific amounts or as a percentage of the original amount. It may also be tied to a cost of living index, such as the Consumer Price Index. Increasing term insurance may be sold as a separate policy, but is usually purchased as part of a package or as cost of living rider to a policy.
Interim Term Insurance
Interim term insurance is type of convertible term insurance written on a person wanting protection immediately, but who is not able to afford permanent protection immediately. It provides interim coverage between now, and the eventual conversion to permanent protection. Interim term insurance is typically written to automatically convert to permanent protection at some point within the first year. While insurability is guaranteed, the premium for the temporary protection is based on the original application age and the premium for permanent protection is based on the age at the time permanent protection begins (the attained age).
Uses of Term Insurance
It's important to note, there is no such thing as "bad insurance." However, every types of insurance is uniquely designed to fill a specific purpose or goal. For term insurance, that goal is usually to provide temporary financial protection in case the insured dies too soon. Just like any other type of insurance, there are many uses, advantages, and disadvantages of term life insurance. Advantages of term life insurance include: • it is less expensive than permanent insurance; • it may protect the insured's insurability if renewable and or convertible; • it may be used in conjunction with debts, mortgages, or as a supplement to whole life insurance; and • it provides the greatest amount of protection for the lowest cost. Disadvantages of term life insurance include: • that no protection is in effect once the term protection ends; • if renewable or convertible, premium rates rise as the insured ages; • due to the temporary nature of term insurance, few death claims are actually paid under term insurance policies; and • it possesses no equity (i.e., cash value). Since it has no cash value, it does not mature as does a whole life policy.
Level Term Insurance
Level term insurance provides a level amount of protection for a specified period, after which the policy expires. A $100,000 10-year level term policy, for example, provides a straight, level $100,000 of coverage for a period of 10 years. A $250,000 term to age 65 policy provides a straight $250,000 of coverage until the insured reaches age 65. If the insured under the $100,000 policy dies at any time within those 10 years, or if the insured under the $250,000 policy dies prior to age 65, the insured's beneficiaries will receive the policy's face amount benefits. If the insured lives beyond the 10-year period or past age 65, the policies expire and no benefits are payable. Remember, the "level" part of the name is really referring to the death benefit. The premiums are already fixed (or level) for the term of the policy as a standard characteristic of term insurance.
Re-entry Term Insurance
Some term policies include a re-entry feature which states that the premium can change at renewal based on insurability. This means that to maintain the lowest premium rate (or a discount from standard), the insured may have to prove insurability again upon renewal. If there is an insurability problem, meaning the insured fails the medical exam, coverage may be maintained but at a higher premium rate. Sometimes re-entry term is also referred to as revertible term.
Renewable Term Insurance
Some term policies may contain an option allowing the policyowner to renew the term policy before its expiration date, without having to provide evidence of insurability. Like the option to convert, the option to renew must be included in the contract when the policy is purchased. The premiums for the renewal period will be higher than the initial period, reflecting the insured's increased age and the insurer's increased risk. This steady increase in premium is often called a step-up premium; as you renew the policy, you climb up another "step." The advantage of the renewal option is that it allows the insured to continue insurance protection, even if the insured has become uninsurable due to a medical issue. However, as the premiums increase each renewal, the cost of the policy typically becomes cost prohibitive, forcing those who are older, and more likely to need the protection, to terminate or not renew the coverage. Renewal options typically provide for several renewal periods or for renewals until a specified age. The option to convert and the option to renew may be combined into a single term policy. For example, a 10-year renewable convertible policy could provide for renewals every 10 years until age 65 and be convertible any time prior to age 65. Annually renewable term (ART) or yearly renewable term (YRT) provides coverage for one year and allows the policyowner to renew coverage each year, without evidence of insurability. This represents the most basic form of life insurance. This renewal is typically automatic and renews at an increased premium. This type of policy provides you with 2 sets of premium rates: a current or scheduled premium and a guaranteed maximum premium.
Term Life Insurance Term life insurance provides low pure cost or temporary jesurance provides
Term life insurance provides pure or temporary protection and is the simplest form of life insurance coverage. Term life provides low-cost insurance protection for a specified, limited, period of time and pays a benefit only if the insured dies during that period. Term life is often called temporary life insurance since it provides protection for a temporary period of time. The period (or TERM) for which these policies are issued can be defined in terms of years (for example, 1-year term, 5-year term, or 20-year term) or in terms of age (for example, term to age 65, term to age 70). Term policies issued for a specified number of years provide coverage from their issue date until the end of the years specified. Term policies issued until a certain age provide coverage from their date of issue until the insured reaches the specified age. Term insurance provides the insured peace of mind against the financial loss that an early death may cause. However, the insured survives, there is no loss, and as such no benefits are paid. For example, Steve purchases a 20-year $75,000 level term policy on his life, and names his sister, Amy, the beneficiary. If Steve dies at any time within the policy's 20-year period, Amy will receive the $75,000 death benefit. If Steve lives beyond that period, the policy term expires and nothing is payable to Steve or to Amy. Additionally, if Steve cancels or lapses the policy during the 20-year term, nothing is payable. Term life policies are able to offer fixed, or constant, level premiums because the premiums are averaged over the term of the policy. Term life provides the greatest amount of death benefit per dollar of initial cash outlay. The primary advantage of term life insurance is that the premium, or cost, of the policy is substantially lower than the premium or cost of a whole life (permanent) insurance policy issued for the same amount. However, unlike permanent (whole) life insurance, term policies do not build cash value. An insurer may offer a number of different types of term life policies. Term life policies are primarily distinguished by the characteristics of their face value (death benefit). Basic types of term life policies include level term, decreasing term, and increasing term.
original age
When the original age is used, the insurer will determine what the appropriate premium would have been had the owner purchased a whole life policy at the "original age" when life insurance was initially purchased. Premiums will be lower using the original age compared to the attained age. However, if this method is selected, the owner must fund or deposit an amount equal to the difference between what they would have spent on the policy had they started with whole life and what they actually spent on term life the policy so far, plus interest. This deposit guarantees lower premiums and also results in higher cash values. The premium and cash value deposit characterize the retroactive conversion that exists if this method is selected.
