What is Life Insurance?
Life insurance is a purchasable product that will leave money to named beneficiaries in the event of the death of the policy holder. The purpose is to assure the least amount of financial disruption to survivors, usually family members of the deceased. It is intended to replace expected lost income of the person who has expired as predetermined at the time the policy goes into effect. The money may be used for living expenses, and even funeral costs if need be.
Life insurance is a simple transaction. Monthly payments are remitted to a life insurance company in exchange for a policy that provides death benefits, or a guarantee of a coverage amount, to be paid to dependents named in the transaction. When premiums lapse, the policy does as well.
Term Life Insurance Defined
Term life insurance is a policy that provides coverage for an interval of time, or ‘term’. It may be purchased for various stretches of time including five, ten, twenty or even forty-year ‘terms’. If the insured passes away, under agreed upon conditions as stated in the policy, then benefits are paid to dependents. However, if the individual is alive at the end of the term, he or she must either renew or convert the coverage to remain insured.
Term life insurance is a valuable asset for persons who have heavy financial burdens that are expected to drop off over time, such as young children who age and will be able to fend for themselves at the completion of a term life insurance policy, or a mortgage that will be paid off. The purchaser of a term life insurance policy should shop for one that provides the option to be modified to a permanent, or ‘whole life’ policy at the completion of the contract. The buyer should expect the price adjustment to be significant due to age.
Traits Specific to Term Life Insurance
Term life insurance has its pros and cons. It is most beneficial under specific circumstances, and to meet certain needs. Its limitations should not be overlooked. Consider the following aspects of a term life insurance policy.
- It has no cash value.
- It is temporary in length and duration.
- Premiums are constant.
- Death benefits are constant.
- It may or may not come with various ‘riders’ or exceptions.
- It may or may not come with conversion options.
Further explanation of these attributes follows.
No Cash Value
Certain types of insurance policies accrue cash value over time. This means that with each premium made a portion of the payment is used to cover the costs of the policy payout should that be necessary, the overhead costs of carrying and maintaining the policy itself, and a separate cash value account where a portion of the premium will accumulate financial worth.
In the case of term life insurance this does not happen, and, except under specific predetermined circumstances, no dividends or access to paid premiums should be expected.
Temporary in Length and Duration
As the title of this form of insurance indicates, term life insurance is not permanent. This allows premiums to remain less expensive than the various alternatives, such as whole life. Remember, the aim of term life insurance is to assure money will be available to meet debts or financial obligations of a limited nature. Term life insurance is especially valuable as replacement income if the person who is insured dies and the family is left with fiscal obligations.
Consistent Premium Costs and Death Benefits
The cost of the premium remains the same throughout the course of the policy. This is usually beneficial, as long as the insured understands renewal costs at the end of the term can be prohibitive, and, perhaps, out of reach. The purpose of term life insurance is to only guarantee income for the specific time-period of the enacted insurance.
However, when purchasing term life insurance, the buyer should understand that premium amounts may vary according to the duration of the policy. In other words, payments for ten, twenty and thirty-year term policies will likely differ, even significantly, and this is a variable that should be taken into consideration at the time the policy is purchased.
Death benefits are unchangeable as well. This means that the insured will receive the same payout of the policy at death no matter how long the policy has been in effect. Often, individuals who buy term life do so in lock step with the cost of a mortgage that amortizes over time, so that as the cost of the mortgage decreases, the available monies can be applied to other needs.
A rider incorporated into an insurance policy of any type amends the terms of the coverage. It may allow for additional payouts according to specific circumstances, such as accidental death, or it may restrict coverage for identified conditions. A common example of this is the negation of a policy in the case of suicide. While the addition of riders may increase the cost of a policy, there is also the possibility that restrictions of modifications may prevent the addition of a rider, as well. It is up to the individual who is buying the policy to familiarize him or herself with all of the available riders, and waivers.
Conversion options are alternatives that are offered by the insurance company to modify the policy at its completion for a different type of coverage, such as whole life. There are several parameters to this option, including the fact that the insurance company must have conversion choices, such as a permanent life insurance product, available.
Limitations on ‘convertible’ options may include such things as an expiration time period for the process. For example, after a certain length of time, conversion for any reason would not be permissible, and a different policy would need to be purchased.
Term Life Insurance Costs
As with most consumer products, the cost of a term life insurance policy depends on a variety of factors including, but not limited to
- the age and health of the individual seeking insurance
- family history
- the amount being sought as coverage
- the desired duration of the policy
- the occupation and hazard level of the person to be insured
- desired riders
- payment terms
Because the cost of a policy is determined by statistics, it makes sense that an insurance company would need to know basic information such as the age and health of the person seeking a policy, as well as a family medical history to identify the potential for pre-existing conditions.
Moreover, the type of employment a prospective customer practices is very important. If an individual is involved in a high-risk occupation, such as ‘skydiving instructor’, he or she should expect the premium to be higher than, for instance, an actuarial.
Finally, the desired amount of coverage will help to determine the cost of the policy, as will any riders. Payment terms can be modified by month, biannually or annually.
Buying Term Life Insurance Policies
There are several ways that term life insurance can be purchased. Policies are available in increments of ten, twenty, or thirty years, and are available online, through an agent, or directly through an insurance agency.
The policy almost never goes into effect immediately, although it is possible to have a 24-hour turnaround time. But, it is just as likely it will take anywhere from four to six weeks. Payment methods range from cash to check, and credit card to bank draft. You can also pay monthly, quarterly, bi-annually, and annually according to what suits your financial needs.
The process of obtaining term life insurance usually begins by filling out a request for a rate quote, which can be done online. This is the best option because you are able to compare quotes from a variety of insurance vendors, comparing and contrasting each according to your requirements.
Be prepared to devote a block of time to completing the application, as it can take anywhere from just a few brief moments to several hours, depending on your age, health and family considerations, and the amount of coverage you are requesting.
Among the questions you are sure to be asked are name, date of birth, and gender, to height and weight, address, annual income, employment, lifestyle habits such as smoking and drinking, health-related questions, medical status, and current policies you may have in place. Upon receipt of the completed application, the insurance company will schedule a medical exam to better determine your state of health, and viability for term life insurance. Obviously, it is more sensible to purchase insurance when you are young and healthy. That way you are put into a pool of purchasers that will ensure a better cost to you.
It is important to note that honesty is essential when completing the application. Be clear about any pre-existing conditions. This will likely raise the cost of the premiums, but with regard to term life insurance, you are also able to choose higher death benefits as a way to offset this.
And, remember, even if you are a social smoker or drinker (only occasionally indulging) you must disclose this. It would be shocking to discover your policy was ineffective because you failed to be completely forthcoming.
Top Rated Insurers & Underwriters
While there are quite a few life insurance companies, and administrators, in the United States, there are a few that have garnered the most notable of reputations. These include AIG, American National, Assurity, Fidelity Life, Pacific Life, Phoenix, Protective, Sagicor, Lincoln Financial Group, and United of Omaha.
Underwriters evaluate risk to determine the potential for profitability of a policy, set a price and establish premium costs to request in exchange for assuming the risk. Underwriting is the ‘heavy lifting’ of insurance, and they may ultimately restrict or deny coverage if they deem the risk to be too great. Underwriters that are highly regarded in the business include Petersen International Underwriters, National General, and the IHC Group.
If you are in the market for insurance, you should take the time to become familiar with the various insurance companies and their underwriters, and the ratings they receive from stakeholders.
Redeeming A Term Life Insurance Policy
In the event of the death of the insured, the experience may be traumatic, but it is important to remember he or she purchased the policy for this very purpose – to help loved ones through a very challenging time. Insurance papers should be kept with other important papers, and when it becomes necessary, be prepared to do the following.
- Contact the insurance company’s helpline number
- Present all medical reports
- Provide proof of medical history if required
Remember, there can be any number of exclusions so be familiar with the specifics of the term life insurance policy in advance. These exceptions may be due to anything from lifestyle-related causes, to suicide or self-inflicted injuries, and sexually transmitted diseases, to various forms of substance abuse.
Final Thoughts on Term Life Insurance
- Premiums are tax-exempt. Benefits paid to the family are tax-exempt, too.
- Renewable’ term life insurance may be an option. It allows the insured to ‘re-up’ on the policy when it expires, usually without having to undergo another medical exam.
- It is not possible to ‘convert’ a policy from one company to another. To do this, you are in effect cancelling the policy you currently hold in order to take on another.
- To ‘surrender’ a term life insurance policy means you quit paying the premiums, and as such, lose the terms of the policy.
- Should a term life insurance policy mature and you are still alive, it becomes null and void. No remittance of any kind is due to you.
What sets Term Essential and Term Elite Apart from other term policies?
PRUDENTIAL is a premier and esteemed life insurance company. They continue to find new ways to meet their customers’ needs. Term Elite and Term Essential are two examples of life insurance products tailored to today’s insurance audience.
With these policies you can
- convert part or all of your coverage to permanent life insurance, without another medical exam to requalify.
- access the Living Needs Benefit if you are terminally ill, to ease financial burdens associated with cost of care.
- customize your policy with supplements that include an Accidental Death Benefit, Waiver of Premium Rider, and Children’s Protection Rider.
Ask us about these and other advantages of the Term Essential and Term Elite policies. We look forward to working with you and meeting all your life insurance needs.