Term life insurance: which type is best for you?
You may already know that term life insurance is often the most affordable form of life insurance, especially for those building a career or starting a family. But while term life is often seen as a cookie-cutter type of life insurance, it actually comes in several different forms. Here's a quick rundown of the most common types of term life insurance.
Level term life insurance
The most basic form of term life insurance, a level term life policy provides a fixed life insurance benefit at a fixed premium for the duration of the policy. Terms range from one year to 30 years, with 20 years being the most common term period. A level term life policy is ideal for young families and others whose income is just starting and whose financial exposure is greatest. Level term policies can have additional provisions or riders.
An adjustable premium term life policy is typically offered with a premium that is initially lower than for a level term policy. However, the premium can be adjusted in the future at the insurer's discretion up to a guaranteed maximum outlined in your policy. The advantage of an adjustable premium policy is the lower initial monthly cost.
This type of term life policy can be "converted" into whole life insurance (a form of permanent life insurance) during a stated conversion period. With convertible term, you have the option to convert your policy into permanent life insurance without having to undergo medical screening at the time of conversion. Even if you develop a medical condition that could prevent you from getting a new policy, you'll still be able to switch to a whole life policy during the conversion period. However, keep in mind that once you convert the policy, your premiums will be calculated based on your "attained age" and may rise significantly.
With a decreasing term life policy, the premium stays the same throughout the life of the policy but the face amount decreases. Often referred to as "mortgage insurance," it can be used to insure against loss of income that you rely on to pay off a mortgage or similar debt that gets smaller with time. The death benefit is designed to decrease over time as your financial exposure diminishes.
You can renew this type of policy for another term when your original term contract comes to an end. Much like convertible term life, you can renew without having to go through a medical exam by the life insurance company. You may pay more when you renew, but it will likely cost you less than a whole life policy at your attained age. A renewable term life policy is useful if you want a shorter term to keep initial premiums low, or if you want the flexibility of being able to renew at the end of your initial term.
Return of premium
Under a return-of-premium arrangement, you are entitled to a partial or full refund of the premiums you have paid. According to Life and Health Insurance Foundation for Education (LIFE), this rider can add 20 to 30 percent to your premium. This feature may or may not benefit you in the long run compared to simply paying lower premiums and saving or investing the difference yourself. Another drawback is if you cancel the policy, you will have paid significantly more for term coverage and may only receive a partial refund or forfeit the refund altogether.
As with all contracts, it's important to carefully review and understand the provisions of any life insurance policy before deciding what is right for you.
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