Term insurance comes in two basic varieties—level term and
decreasing term. These days, almost everyone buys level term
insurance. The terms “level” and “decreasing” refer to the death
benefit amount during the term of the policy. A level term policy
pays the same benefit amount if death occurs at any point during the
term.
Common types of level term are:
yearly- (or
annually-) renewable term
5-year
renewable term
10-year term
15-year term
20-year term
25-year term
30-year term
term to a
specified age (usually 65 or 100)
Yearly renewable term, once popular, is no longer a top seller. The
most popular type is now 20-year term. Most companies will not sell
term insurance to an applicant for a term that ends past his or her
80th birthday.
If a policy is “renewable,” that means it continues in force for an
additional term or terms, up to a specified age, even if the health
of the insured (or other factors) would cause him or her to be
rejected if he or she applied for a new life insurance policy.
Generally, the premium for the policy is based on the insured
person’s age and health at the policy’s start, and the premium
remains the same (level) for the length of the term. So, premiums
for 5-year renewable term can be level for 5 years, then to a new
rate reflecting the new age of the insured, and so on every five
years. Some longer term policies will guarantee that the premium
will not increase during the term; others don’t make that guarantee,
enabling the insurance company to raise the rate during the policy’s
term.
Some term policies are convertible. This means that the policy’s
owner has the right to change it into a permanent type of life
insurance usually at any point during the period of the term without additional evidence of insurability.
“Return of Premium”
In most types of term insurance, including
homeowners and auto insurance, if you haven’t had
a claim under the policy by the time it expires,
you get no refund of the premium. Your premium
bought the protection that you had but didn’t
need, and you’ve received fair value. Some term
life insurance consumers have been unhappy at this
outcome, so some insurers have created term life
with a “return of premium” feature. The premiums
for the insurance with this feature are often
significantly higher than for policies without it,
and they generally require that you keep the
policy in force to its term or else you forfeit
the return of premium benefit.
