You’re in the market for life insurance and getting bombarded by all the crazy words used to describe insurance products. And with all of the hype surrounding term life insurance you are probably wondering what it is and if it is something worth while or just another fancy marketing term. Well the fact is that even though insurance may be confusing, term life is probably the simplest type of insurance to understand.
The industry uses the word “term” to describe it because it is insurance that is purchased for a particular term in years. For instance a 2-year term policy would be a one that covers you for 2 years no more, no less. When the term has expired you will need to find a new insurance policy.
There that was simple wasn’t it?
Now you need to understand the upside and downside to the term life policy if you are going to make a smart financial decision.
Cost – As you probably all ready know, term life is popular because it costs considerably less than a whole life policy. This makes the term life policy a reasonable choice for people who are under the age of 50. And they are especially useful for people who are on a tight budget.
Rising Renewal Rates – As you age the cost of renewing a term life policy can rise drastically. This is one of the reasons that the age of 50 is often considered to be the top age where a term life policy makes sense.
In Eligibility – Because you are purchasing insurance that essentially expires you are purchasing insurance that need to be repurchases periodically. This creates a very real risk that you may develop some health problem that may make you in eligible for renewal. Some better policies offer a guaranteed renewal clause, and some are called convertible, which means that you can convert them to a whole life policy if you so choose. These types of policies guarantee eligibility without the need for a physical exam.
No Equity – Term life policies have no ability to gain internal value (called equity) like whole life policies. This means that no matter how long you pay your premiums you get no residual benefit. Kind of like renting a home you get the benefits of the home but when you stop paying you get kicked out. Other policies like whole life policies build up equity to the point where your insurance can pay for itself without the need for further monthly payments.
All things considered a term life policy is a great choice for those people with tighter budgets. However it would be wise to consider purchasing a convertible or guaranteed renewal policy. This way if your health changes for any reason you will still have the option to keep life insurance coverage.