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What are the types of term insurance policies?
Term insurance
comes in two basic varieties—level term and decreasing term. These
days, almost everyone buys level term insurance. The terms “level” and
“decreasing” refer to the death benefit amount during the term of the
policy. A level term policy pays the same benefit amount if death
occurs at any point during the term.
Common types of level term are:
- yearly- (or annually-) renewable
term
- 5-year renewable term
- 10-year term
- 15-year term
- 20-year term
- 25-year term
- 30-year term
- term to a specified age (usually 65)
Yearly renewable term, once popular, is no longer a top seller. The
most popular type is now 20-year term. Most companies will not sell
term insurance to an applicant for a term that ends past his or her
80th birthday.
If a policy is “renewable,” that means it continues in force for an
additional term or terms, up to a specified age, even if the health of
the insured (or other factors) would cause him or her to be rejected if
he or she applied for a new life insurance policy.
Generally, the premium for the policy is based on the insured person’s
age and health at the policy’s start, and the premium remains the same
(level) for the length of the term. So, premiums for 5-year renewable
term can be level for 5 years, then to a new rate reflecting the new
age of the insured, and so on every five years. Some longer term
policies will guarantee that the premium will not increase during the
term; others don’t make that guarantee, enabling the insurance company
to raise the rate during the policy’s term.
Some term policies are convertible. This means that the policy’s owner
has the right to change it into a permanent type of life insurance
without additional evidence of insurability.
“Return of Premium”
In most types of term insurance, including homeowners and auto
insurance, if you haven’t had a claim under the policy by the time it
expires, you get no refund of the premium. Your premium bought the
protection that you had but didn’t need, and you’ve received fair
value. Some term life insurance consumers have been unhappy at this
outcome, so some insurers have created term life with a “return of
premium” feature. The premiums for the insurance with this feature are
often significantly higher than for policies without it, and they
generally require that you keep the policy in force to its term or else
you forfeit the return of premium benefit. Some policies will return
the base premium but not the extra premium (for the return benefit),
and others will return both. |
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