Answers to your questions on different types of Term Insurance
The first life insurance policy a young family will own is often Term Life. They purchase it because it is the least expensive type of life insurance, is available in high face amounts, and can have several different types of riders.
Term life may be the best for you at the time you purchase it, but you need to know how it works and how to defend your options, or you could be very disappointed later in life.
What is a Term Life policy?
Term life is temporary. It gives your beneficiaries a sum of money if you should die during the period of the term, usually 20 years. When the term expires, you have no cash value, and, unless the policy is renewable, you have no life insurance.
Will the premium be unchanged during the Term?
Watch out for this one. Life insurance offers that come through the mail may say "level benefit." If you look close, you will see that such offers may have an increase in premium every five years. You don't want that. The apparently cheap price for the first five years will be radically offset by the premium increase in later years.
What is meant by renewable?
Most Term policies are renewable at the end of the term. However, don't assume yours will be, as some companies offer policies that simply end. If it is renewable, you will be able to renew it to anything the company sells, which could be annual renewable, decreasing term, universal, or whole life.
Which renewable option should one have?
The best choices are either universal or whole life. Regardless of your choice, your premium will be based on your age at that time and will be MUCH higher than the original term. Also, several companies offer only annual renewable or decreasing term. In annual renewable, your premium goes up every year while the face value remains constant, or level. That increasing premium can easily be $1000 per month in 10 or 15 years. If you choose decreasing term, your premium will remain level, but the face value will drop every year. If you live another 15 or 20 years beyond the end of the initial term, you could end up with less than $1000 of face value regardless of the amount of money you have put into the policy. Chances are, you won't want annual renewable or decreasing term. So make sure the company from whom you purchase your term has at least a universal option. (Many companies no longer sell whole life).
What riders should I choose?
The first riders many clients look for are spouse riders and child riders. Both of these riders add just a few dollars to the premium. The spouse rider is not always available on a Term policy—for good reason. When the Term expires, two people will have to find additional insurance. Also, if the insured dies first, the spouse will have to either convert the rider or purchase additional insurance within 30 days. The price will be based on attained age. It is much better, especially with Term, for each partner to have his/her own insurance.
Child riders are a little different. They automatically are terminated when the child reaches 25 years of age. However, between the ages of 18 and 25, the child can convert the rider to individual insurance without proof of medical insurability. Since not all companies allow the child conversion, be sure to ask.
Another rider that is well worth taking on a term policy is the waiver of premium for disability. If you should become completely disabled prior to age 60 or 65—depending on the company—your premium will be waived for the rest of your life. This rider is particularly valuable on a Term policy because it means the company will have to convert the policy and continue to pay the premium for the rest of your life. For a person who becomes disabled, this rider essentially makes a whole life policy out of a Term policy.
Several other riders may be available, depending on the company.