Types of Life Insurance
Many consumers are aware of the importance of life insurance, but it can be difficult to choose one type of policy with so many available options. Each has different features, making a careful analysis important before settling on a policy. With this in mind, here’s a look at the most common forms of term life insurance.
Guaranteed Level Term Life Insurance
The death benefit in this type of policy is guaranteed to never fall throughout the life of its contract. Most guaranteed level term life insurance policy contracts are divided into five-year increments, with the shortest lasting five years and the longest at 30 years. Most of the time, medical exams are not required to renew guaranteed level term life insurance policies, but there may be increases in annual premiums. This popular form of life insurance is cheaper than permanent life insurance, but it still carries the same financial protection to policy beneficiaries.
Annual Renewal Life Insurance
Annually renewable term life insurance involves one-year contracts, with premiums calculated according to the age and health of policyholders. An annually renewable term life insurance policy can be renewed at the end of each year, but its price will increase, and people diagnosed with terminal illness during the year are not usually allowed to renew. Some companies, however, guarantee policyholders’ ability to renew regardless of health status.
This type of premium is popular with younger individuals and those particularly concerned with how their life insurance policies will play into their long-term budgets. Older individuals often pay far more for these policies than younger policyholders. Because annually renewable premiums do not increase beyond predetermined figures, financial planning can be significantly easier with these policies. Businesses commonly offer this type of insurance to their workers due to its easy compatibility with employment of indefinite length.
Return of Premium Term Life Insurance
Similar to guaranteed level policies, return of premium term life insurance policies offer the same death benefit throughout the life of the policy. Premiums are usually paid monthly, quarterly or annually and the policies frequently last for 15, 20 year terms or 30 years. The defining feature of this form of term life insurance is that the premiums paid over the life of the policy are paid back to policyholders at the end of their contracts if they are still alive. Premiums may cost as much as 50 percent more for this benefit, but individuals and families who want the money back later often value this benefit. Although these premiums do not accumulate value or allow for loans, they are untaxed upon payout because they were paid after taxes in the first place.
Return of premium is commonly offered as a feature on other long-term life insurance policies. For policyholders of return of premium policies, constant payment is essential for the first five to six years to avoid loss of premium or declined term rates in the meantime. As long as payments are made continuously, this form of life insurance is often very reliable. Savvy consumers, however, may want to look up the ratings of prospective insurers before signing a contract.
Convertible Term Life Insurance
A convertible term life insurance policy is for individuals who want guaranteed level term life insurance with the ability to switch to permanent life insurance later. It’s popular with people who opt for guaranteed level insurance early in life and want to maintain an equal level of coverage later without renewing their policies. If you have less liabilities at that time you can decrease your death benefit from say 1 million to $500,000 of life insurance. Though the price will increase when converted into a permanent policy, you will have adequate savings by cutting your benefit in half.
Some policyholders choose to convert their policies gradually as their salaries grow, but many convert their life insurance when their premiums escalate or when they begin suffering from health problems. Since no medical exam is required for conversion, even policyholders with terminal illnesses can easily switch over if they need to. Most do this before growing very old, however. To reduce financial risk, many insurance companies maintain a cap on how old policyholders can be when they convert to permanent insurance. Most companies only offer term life insurance to applicants under 75 years old, but Banner Life Insurance Company makes term products available up to age 95.
Decreasing Term Life Insurance
This form of term life insurance is cheaper than other types, decreasing in cost over the life of the policy. It’s commonly purchased by individuals who need greater coverage in the short-term, say a 10 year term, but less coverage later, such as while raising small children. Many homeowners also purchase this type of policy to cover a mortgage or another loan.
Needs for policy features vary, but the importance of carrying life insurance stays consistent. Life insurance of some type is a worthwhile investment to prevent debt and burial problems from becoming a burden and to help ensure the welfare of loved ones after we pass on.