When life insurance is brought up, most people automatically think of term insurance. What most people don't realize, however, is that there are different types of insurance. We'll start out by defining term insurance. Term insurance is insurance with a specified death benefit (face amount) that lasts for a specified period of time. There are four types of term insurance.
- Level Term Insurance
- Annual Renewable Term Insurance
- Decreasing Term Insurance
- Return of Premium
Level term insurance is what most people think of when they think about life insurance. They pay X amount of dollars per month for X amount of years. Depending on what the insurance company determines your worth is will determine the maximum death benefit available to you. So there is no way to be over insured. They will not give you more insurance than they feel you are worth. This takes into consideration many factors, such as income, age, health, net worth, etc.
Premiums are determined on much the same basis: death benefit amount, health, age, and sex. So the younger and more healthy you are, the lower your premium. Since women statistically live longer than men, their premium is lower. The lower the death benefit amount, the lower your premium as well. The most common types of level term insurance are 10, 15, 20, and 30 year level term. This means that the insurance will only last for that many years. The lower number of years, the lower premium you pay.
The benefit to term insurance is that it buys a lot of death benefit for a low premium. The downside is that it expires, and if you don't die within the term your beneficiaries don't get anything.
Annual Renewable Term
Annual renewable term is very similar to level term with the exception that it renews every single year. There is no guarantee that your premium remains level. As a matter of fact, it's guaranteed not to remain level, but to increase each year with your age.
It is generally very inexpensive when you are young and gets much more expensive the longer you keep it. Usually level term is the better deal over annual renewable term because the premium stays level and averages less over the term than annual renewable term.
Decreasing term, also known as mortgage insurance, is rarely sold anymore because of the lowered pricing of level term. It was originally designed to pay for a mortgage in the event that you pass away before your mortgage was fully paid. As is implied by its name, it decreases at the same rate your mortgage does, so it will only last as long as your mortgage.
Return of Premium
Return of premium insurance does exactly as the name implies. It acts just like a level term, but at the end of the term the insurance company will refund you all of the money you paid toward the premium. It sounds pretty sweet, but the monthly premium for it is high. It is priced similarly to a permanent insurance policy because the company is on the hook for the total premiums paid.
So which policy is right for you? That all depends on your goals. It's also possible that none are right, but we'll get into that in the next post when we talk about permanent insurance. Contact us for any questions regarding term insurance or to get a free quote.