Term life insurance is a
life insurance which provides coverage for a limited period of time,
the relevant term. After that period, the insured can either drop the
policy or pay annually increasing premiums to continue the coverage.
If the insured dies during the term, the death benefit will be paid
to the beneficiary. Term insurance is often the most inexpensive way
to purchase a substantial death benefit on a coverage amount per
premium dollar basis.
|
|
|
|
|
|
Term
life insurance is the original form of life insurance and is
considered to be pure insurance protection because it builds no cash
value. This is in contrast to permanent life insurance such as whole
life, universal life, and variable universal life.
Term
insurance functions in a manner similar to most other types of
insurance in that it satisfies claims against what is insured if the
premiums are up to date and the contract has not expired, and does
not expect a return of Premium dollars if no claims are filed. As an
example, auto insurance will satisfy claims against the insured in
the event of an accident and a home owner policy will satisfy claims
against the home if it is damaged or destroyed by, for example, an
earthquake or fire. Whether or not these events will occur is
uncertain, and if the policy holder discontinues coverage because he
has sold the insured car or home the insurance company will not
refund the premium. This is purely risk protection.
|
the
simplest form of term life insurance is for a term of one year. The
death benefit would be paid by the insurance company if the insured
died during the one year term, while no benefit is paid if the
insured dies one day after the last day of the one year term. The
premium paid is then based on the expected probability of the insured
dying in that one year.
Because
the likelihood of dying in the next year is low for anyone that the
insurer would accept for the coverage, purchase of only one year of
coverage is rare.
One of
the main challenges to renewal experienced with some of these
policies is requiring proof of insurability. For instance the insured
could acquire a terminal illness within the term, but not actually
die until after the term expires. Because of the terminal illness,
the purchaser would likely be uninsurable
after the
expiration of the initial term, and would be unable to renew the
policy or purchase a new one.
This
issue is frequently overcome by a feature in some policies called
guaranteed reinsurability included on some programs, that allows the
insured to renew without proof of insurability.
A
version of term insurance which is
commonly purchased
is annual
renewable term
(ART). In this
form, the premium is paid for one year of coverage, but the policy is
guaranteed to be able to be continued each year for a given period of
years. This period varies from 10 to 30 years, or occasionally until
age 95. As the insured ages, the premiums increase with each renewal
period, eventually becoming financially unenviable as the rates for a
policy would eventually exceed the cost of a permanent policy. In
this form the premium is slightly higher than for a single year's
coverage, but the chances of the benefit being paid are much higher
.
|
