Term life is the most straightforward type of life insurance. This type of policy doesn’t have the bells and whistles of a whole life policy, but can be obtained at a low-cost for those who need basic protection.
If the policyholder dies within the term, the death benefit is paid to the beneficiary of the policy. The “term” of a term life policy is generally 10, 15, 25 or 30 years, and most policies will cover you up until the age of 65 or 70.
According to the Insurance Information Institute (III), a clearinghouse for insurance information, there are many options to choose from when deciding on term life. They include the following:
Level term life assures that the premium and the death benefit remain the same throughout its duration. If you out live the term agreed upon, you’ll lose coverage and will likely have to purchase a new policy. This could result in paying higher premiums because of age and health status.
Decreasing term life death benefits decrease in yearly increments while the premiums remain the same throughout the duration of the policy. Decreasing term is often used to insure certain financial obligations that diminish in time, such as a home mortgage. If the policyholder dies, the beneficiaries would only receive the amount of death benefit that remains in the policy.
Annual renewable term life is typically set at 10, 15, 25 or 30 years. It also renews automatically each year, but premiums also increase upon renewal.
Other options to consider is buying term life that has guaranteed renewal or guaranteed convertible built into the policy.
Jack Dewald, Chair-elect for the Life and Health Foundation for Education, a non-profit consumer-education foundation, says it’s a good idea to purchase a policy that has both of these components.
“A policy that is guaranteed renewal means that you can continue coverage at the end of your term without having to take a medical evaluation in order to renew because renewal is automatic,” said Dewald. “But you’ll pay a much higher premium for that option.”
Return-of-premium (ROP) term life is similar to level premium term life, but has an additional cost savings advantage. Premiums are returned to the policyholder if they do not die before the term expires, and some or all of the premium paid into the policy can be recouped if the policyholder decides to terminate the policy before then. This is often a good policy for people who fall into preferred risk classes because it is possible for them to pay lower premiums than those in the standard categories.
In most cases, term life insurers allow you the option to pay premiums once a year, twice a year, four times a year or on a monthly basis. But remember, if you choose to pay semi-annually, quarterly or monthly, rather than paying annually, the premium cost may be higher.