What Are the Types of Term Life Insurance Policies?

 

In 2020, almost half of all adults in the US don’t have life insurance. However, there’s a “needs gap” of 41 million who say they need it but don’t have it.

The cost of life insurance is primarily why so many people are reluctant to buy a policy. Unfortunately, about half of the population also overestimate the cost of a term life policy. In contrast to whole life coverage, term life policies are much more affordable.

What’s the difference between term vs. whole life insurance? Unlike permanent coverage, a term life insurance policy only lasts for a set number of years, such as ten, fifteen, or twenty. It also doesn’t build a cash value or savings other than the death benefit.

Below is a breakdown of the basic types of term life insurance to help you decide if one is right up your alley.

Level Term Life Policy

A level term policy is the standard type of term life coverage. Both the death benefit and premiums remain the same throughout the entire term. Typically, level policies are sold in five-year increments ranging from ten to thirty years.

If you’re a young parent with small children, this level of protection can see your family through until your kids finish college. You might be wondering, why not just get whole life insurance then if you need coverage for that length of time?

The premiums you pay monthly for a term life coverage are significantly cheaper than a whole life policy for the same death benefit. Also, some insurance companies will allow you to convert your term policy into whole life or a modified endowment contract (MEC). Read more about MEC vs. permanent coverage at paradigmlife.net/blog/understanding-modified-endowment-contract-mec/.

Renewable Term

This type of coverage has no specified period, but you can instead renew the policy each year. The good news is that you don’t have to requalify for insurability once the term ends. It can be a favorable arrangement if you develop health issues that might inhibit you from applying for a new policy.

However, the guaranteed renewable term coverage comes at a price in the form of higher rates. As you get up in years, so do the premiums. After several years, the policy could become cost-prohibitive and may not be the best option if you’re looking for long-term coverage.

Decreasing or Mortgage Protection Insurance

If you choose a decreasing term policy, the death benefit will decrease every year of the term, based on a predetermined schedule. However, the premiums you pay remain constant. Due to the declining death benefit, decreasing term coverage is usually cheaper than level term policies.

A decreasing term policy is often paired with a mortgage or any decreasing debt. It can be a good deal since the amount of coverage you need will match your shrinking debt obligation.

Consider Term Coverage When Buying Life Insurance

These days, life insurance is practically mandatory. While permanent coverage can be a significant financial burden, a more affordable option is available. For a reasonably low cost, you can purchase a term life insurance policy to secure your family’s future.

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