Term Life Insurance Considerations

Is term insurance right for you?

Most people have great plans for themselves and their family and, quite often, those plans require a good deal of funds. Whether it's sending children to college, purchasing a new home, or starting a business, adequate financial resources are essential. Your income is the engine that powers these dreams, helping to turn them into reality, but what if you were to die? How would this affect your family's future plans?

For generations, life insurance has proven to be one of the most cost-effective ways to safeguard a family's dreams. You can never be replaced but, with life insurance, your family could probably handle the financial pressure that comes with the loss of income due to premature death. The proceeds of life insurance generally pass to your beneficiaries free from federal income tax and can be used to help preserve your family's standard of living, cover outstanding debts, and keep their dreams alive. For many years, term life insurance has proven to be an effective means of providing protection for those who need coverage for a limited period of time.

Why is term so popular?

Term insurance is perhaps the most basic form of life insurance. It usually provides affordable protection, often with a guaranteed premium, for some period of time. If the insured should die while the policy is in force, the face amount is paid to the named beneficiary. At the end of the premium guarantee period, the insured can renew the coverage at a higher premium. The premium for term insurance is initially lower than a comparable permanent insurance policy; however, it can increase at each renewal. This initial lower premium usually makes term insurance an ideal choice for individuals with a temporary need for life insurance protection.

Unlike permanent insurance, term does not accumulate cash value, and in most instances does not earn dividends. There are two basic types of term policies: increasing premium term, which renews annually at a higher premium, and level premium term, which features a fixed premium for a specific number of years and then increases in subsequent years.

When is term appropriate?

Term insurance may be suitable in several situations. Here are just three examples:

  • Temporary need for protection
    Term insurance is often used as protection when a loan is taken. A term policy in the amount of the loan could assure that the debt is repaid in the event the insured dies. A business owner who borrows money to enlarge his or her operation could purchase a term policy in the amount of that loan. Often, homeowners choose term insurance to protect their mortgage over the life of the loan, or, parents who are funding a child's college education could use term as a hedge until that child graduates. Whenever life insurance is needed for a relatively short period of time, term may be the solution.
  • Limited funds for Permanent Life Insurance
    In situations where life insurance is essential, but dollars are scarce, term could serve as a stop-gap. Individuals fresh out of college and starting a career may want to consider term coverage. If they're like many students, they probably have student loans that need to be repaid. If they should die before the loans are repaid, that obligation could fall to their estate. Term insurance could safeguard against that, and when they've achieved some level of success and have sufficient funds, they can convert the term policy into a permanent insurance policy.
  • As a supplement to Permanent Life Insurance
    An excellent use of term insurance is as an added "rider" to a permanent plan. Let's say an individual requires $200,000 in life insurance coverage but can't afford the premium for a 100% permanent plan. An affordable option may be to purchase a $50,000 permanent policy with a $150,000 term rider. That mixture would provide the desired amount of coverage with more limited cash value accumulation, at a premium that fits within a given budget. In the future, when income increases, the term portion can be converted into permanent insurance.

The conversion privilege.

One of the most valuable benefits of a term policy is the conversion privilege. Many term policies offer the ability to convert term coverage into permanent insurance without submitting proof of good health. This privilege is usually available during the first several years of the policy. If permanent insurance is not within your budget at the present time, the conversion privilege guarantees your insurability at a later date—even if you become uninsurable.

Most companies offer different possibilities for conversions, so be sure to discuss these options with your agent when you're ready to convert. Your agent can supply a computer-generated illustration to help you make your decision.

What to look for in a term policy.

When choosing a term policy that's right for you, you'll want to be sure to look closely at the features it offers.

Be sure that the policy is guaranteed renewable—that is, you can renew your policy without a physical exam. Also be sure that it contains a conversion privilege. These two features together offer protection of your future insurability.

Some companies offer a rider to extend the premium guarantee (sometimes called a modification of premium guarantee rider), which, for an additional cost, guarantees that for a limited time, the premium will not be greater than the scheduled premium stated in the policy contract. This could give you the peace of mind that, in the short term, premiums won't be out of your price range.

For many years, insurers have offered a lower cost premium to non-smokers. Recently, some companies have added an additional standard premium class for individuals who smoke, but are otherwise in good health, and non-smokers with minor medical impairments. If one of these situations applies to you, it could save money to look for a company that offers such a rating class.

Most experts say it's not advisable to simply shop for the policy with the lowest premium. Before worrying about saving a few bucks, you'll want to be sure that the insurance company is financially sound. Longevity, size, and ratings are key considerations when choosing an insurance company. You can check the financial health of insurers by reading what the independent ratings agencies say about them. A.M. Best and Standard & Poor's are two companies that annually publish ratings of insurance companies. 

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