by Donn J. Sinclair, MBA February 21, 2020
Term insurance is the most basic form of life insurance, and term life insurance is normally the least expensive and best value for your life insurance dollar. Term life insurance provides life insurance coverage for a specific period of time or term. This term period might be a 1-year term, 10-year term, and as long as a 30-year term life insurance policy.
The policy owner makes a premium payment either monthly, quarterly, semi-annually, or annually. As long as the insured makes the premium payments on time, then the life insurance policy is in effect until at least the end of the term.
The length of the term life insurance period should be selected long enough to provide life insurance coverage for the years when the insurance proceeds would be needed to replace money or income lost due to the insured’s death. If the insured(s) dies during the term life insurance period, then the insurance amount or beneficial proceeds are paid to the beneficiaries. After the term period expires, if the term life insurance was not extended, then there is no longer any insurance, and no beneficial proceeds to be paid.
Most term life insurance policies have maximum issue ages. If you are in your sixties or early seventies, then plan ahead with a term life insurance period to match or exceed your insurance needs.
There are three basic types of term life insurance. Annual renewable term insurance premium rise as you age; however, these policies normally have the lowest early year premiums. These policies are best suited to provide a large amount of insurance coverage at low premiums in the early years; with the expectation that you will have increased income or lower other expenses in the years ahead. Another consideration is that you purchase a 20-year annual renewable term life insurance policy, expecting to need the coverage for less than the full term. Should the insurance need continue longer than expected, then you still have coverage years remaining.
The second type is level premium term life insurance. Here both the insurance amount and the premium are locked in for the life of the term life insurance period. You have the peace of mind of the term life insurance, and are guaranteed your premiums will not rise during the term period.
The third type is decreasing term life insurance. This type of term life insurance is quite popular for providing mortgage protection for a surviving spouse. The premiums stay level, and the insurance amount decreases to reflect a decreasing mortgage balance. If the insured dies during the term life insurance period, then the beneficiary receives insurance proceeds which should be sufficient to payoff the mortgage balance.
Decreasing term life insurance may also be beneficial for those with no mortgage, yet child(ren) responsibilities. As children grow and the accompanying financial responsibility decreases, the term life insurance coverage decreases to reflect lower financial responsibilities.
Donn J. Sinclair, MBA (803)329-0609
February 21, 2020
Updated in Charlotte NC and Rock Hill SC