Term Insurance is exactly that; life insurance that will cover a person for a specific amount of time. Depending on the insurance company you can get term policies that cover 1, 5, 10, 15, 20, 25 30 years in coverage. This is often one of the best policy choices for people just starting out although there are reasons that other types of policies might be the better choice.
For most term life insurance policies you get a fixed amount of life insurance guaranteed for the term or length of the policy as long as you pay the fixed monthly, quarterly, semi-annually or yearly premiums on time. These premiums are what are referred to as fixed premiums, which simply means the payments will stay the same amount over time.
The owner of the policy pays the premium to the life insurance company that in turn will pay or the contracted amount of the policy if the person that is insured dies. If the premiums are not paid, the policy is terminated and the insurance company is no longer obligated to pay out the contracted amount.
The contracted amount is known as the fixed death benefit and does not change over time. If the insured dies the day after coverage starts of on the last day of the coverage the insurance company will pay out the same amount. In other words, when you buy a standard term insurance policy you are paying the insurance company the same amount for the same coverage for a determined amount of time.
Most people consider term life to be temporary because it does not last your whole life. While this is true, there are some exceptions with convertible term policies that are available in today’s insurance market place. These are policies that help people as they realize the end of their term policy is inevitable or their situation changes and they know that term is no longer their best option for life insurance.
One of the questions people ask is what happens once the term is over? If you do nothing, the policy is terminated and the policy owner no longer pays premiums. However, most policies do not terminate automatically and you have options to extend the term of coverage. You need to know that this extension is no longer covered by the original agreement or contract and can become very expensive on an annual basis.
Read through the contract to see what it says about how your premiums can change and don’t be surprised if they can go up much higher than you originally paid. Depending on where the insured is at this time in life will lead you to either extend the coverage or consider alternative options. Check to see at what point in age the insured can no longer extend their coverage. For most policies the age is 90 but can vary per policy and insurance company.
Another alternative many term life insurance policies offer is some type of conversion that replaces the existing term life policy with a type of permanent life insurance policy. Make sure you read the fine print of these policies because they can be very different from what you might think. Some might be very simple and offer to convert to the same death benefit at the end of the term while others might be very specific when you can convert the policy from term to permanent. It’s important to know what the policy says and not just what the insurance guy tells you so read the policy and ask the questions.
There are some term policies that offer a renewal but they tend to be rare these days. Renewable term life insurance can be replaced with a term life insurance policy of the same type, face amount, and health class. Because you don’t have to reapply for this type of life insurance it protects you from having to go into a different health class that could have considerably higher premiums. Of course if your health is much better (no longer smoking or weight issues are better) you might actually be better off starting your application process over again.
Check out Perm Insurance as well before making a decision.