Term life insurance or just term assurance is an insurance policy that provides coverage for just the limited term period or the relevant term. After the term period has ended the insurer will not be able to neither drop the insurance policy nor pay annually increasing premiums to prolong the coverage. However in case the insured dies within the term period then the company would pay death benefits to the beneficiary. This term life insurance is generally not much expensive to purchase a substantial death benefit through the coverage amount on per dollar premium basis.
As term life insurance does not build any cash value it is the original form of life insurance which is considered to be pure in insurance protection. The term life insurance basically functions in the same way like other types of insurance where it also satisfies the claims against what is insured if the contract has not expired and the premiums are up to date and it also does not expect any return of premium dollars if there is not claim filed. For instance, the auto insurance would basically satisfy the claims against the insured in case of an accident while the home owner policy claims would satisfy damages done to the home. Whether these events occur or not is uncertain, and in case the policy holder decides to discontinue the coverage because the home or auto has been sold the company would not refund the premiums and this is the same with term life insurance.
As term life insurance is the best death benefit policy the primary use of this insurance is to provide coverage of financial responsibilities for the insured person. These responsibilities are very limited by they include, mortgages, funeral costs, collage education for dependents, dependent care and consumer debt.
Annual Renewable Term
The simplest type of this term life insurance is the one year term. Death benefits will be paid by the insurance company in case the insured person dies within the one year term of insurance. However the insurance holder might not benefit if he dies even one day after the one year term of the policy. Therefore the premium that is paid would be based on the expected probability of the insured person of dying during the one year term. As the likelihood of dying in the one year insurance term is very low for almost anyone, the purchase of this term life insurance with one year term is very rare. However the main challenge for the renewal to something experienced with some other policies is the requiring of insurability proof. For instance the insured might acquire some terminal illness within the one year term but might not actually die until the term expires. Due to this terminal illness the insurance purchaser will likely be uninsurable after the one year term has expired and will also not be able to renew the policy or even purchase a new policy.
However this issue is often overcome with the guaranteed reinsurability feature offered with some other programs which let the insured person to renew the term life insurance without any insurability proof. Therefore the version of term life insurance which is basically purchased is the annual renewable term or ART. With this type of insurance, the premiums would be paid for one year of coverage but the insurance policy is guaranteed to let you continue the policy for some given period of years. This period can vary from 10 to 30 years but generally until age 95. However you should know that as the insured ages, the premiums will also increase with every renewal period which eventually becomes financially unviable as the rates of the policy might even exceed the cost for a permanent policy. Therefore in this type of insurance policy the premium is slightly higher compared to single year coverage but there are very high chances of the death benefits being paid.
Level Term Life Insurance
The guaranteed level premium term life insurance is much similar to the annual renewable term insurance as the premium is guaranteed to remain the same for the given term period of years. In this type the premium that I paid every year would be the same and will be based on the summed cost of annual renewable term rates of each year, where there will be adjustments made to the time value by the insurer. Therefore the premiums can get higher if the term of the premium level is longer because as you get older the premiums would also get expensive. However most of the level term programs generally include renewal options and let the insured person to renew for the maximum guaranteed rate only if the insured period is to be extended. Most often this clause is invoked only if the insured person’s health deteriorates significantly within the term of the insurance.