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Types of term life insurance policies
What is term life insurance?
Term life insurance is a contract between you and an insurance company in which you agree to pay premiums for a set period of time (a ‘term’) – usually 10, 20, or 30 years – in exchange for a death benefit that will be paid out to your beneficiaries if you die during that time provided your premiums were paid.
Term life insurance allows people to have life insurance coverage for a set amount of time at an affordable rate. Term life policies are not meant to be permanent: they are meant to fill a need for a fixed period of time. There are ways in which you can benefit from term life insurance, though; we will cover the different types of term policies in more detail next.
Types of term life insurance
Because of its affordability, term life is a popular form of insurance coverage. Unlike permanent life insurance, term policies are not meant to last a lifetime. Instead, they are for a specific number of years which typically range from 10 to 30. At the end of the term, the policy and the death benefit expire. For this reason, term life insurance coverage can be a great choice if you need affordable coverage. A good example would be while you’re raising a family and you need a large death benefit. However, a term policy would be a poor choice if you need lifelong coverage. If you have special needs dependents or want to build cash value in your policy, a term policy would not be the best choice.
There is more than one type of term policy. Let’s review six types of term insurance you may consider.
Level term plans
Level term plans are simple to understand. The death benefit and the life insurance premiums on this policy remain level for the term of the policy. Knowing this is a fixed expense, you can use the premium amount for long-term budget planning.
Once you choose for how many years you want to be covered and the death benefit amount you need, you can then plan for the future with this information. The death benefit on term policies is level, so your beneficiaries will receive the same amount throughout the length of the policy.
There are drawbacks to level term insurance. Consider that you may end up getting your policy at a time when your health is not the best. Once you have locked the rates on the term policy, you are stuck. If your health improves, you will be paying insurance premium payments at a higher rate than necessary.
Another thing to consider is that your life insurance needs may be less in the future. You become debt-free, and your dependents grow and don’t need the initial benefit of your term life insurance. Since you have already locked in the premium and death benefit amounts, you may end up paying for more coverage than you need down the line.
Increasing term plans
In level term life insurance policies, the coverage and premiums stay the same during the policy term. In increasing term, the amount of coverage increases during the policy term and so do the premiums.
There are still good reasons why you may choose this form of life insurance.
One of those reasons is increasing inflation. $100,000 today will be worth a lot less 20 years from now.
There are two ways by which the death benefit of your life insurance increases; by a flat rate or by percentages. For example, if your initial coverage amount is $100,000, you can choose to increase coverage $10,000 every five years at a flat rate of 5%. At the end of a 20-year policy, your death benefit would be $140,000.
If you choose the percentage route, you can have the death benefit increase by a fixed percentage every year. If we take the same death benefit of $100,000 and choose to increase it by 5% every year. In 20 years, you would have $265,330.
There are cases when you may need the opposite of increasing term life insurance. Let’s look at decreasing term policies.
Decreasing term plans
Life insurance policies with a provision to reduce the death benefit and the premium over time are known as decreasing term life insurance. These life insurance policies have their purpose. Decreasing term policies are often used as “credit life insurance” to pay off debt if something happens to you.
One example where you may need a policy with decreasing death benefit may be when you start up a business. Let’s say you start a business with a partner. You both apply for a business loan of $200,000 to get started. It makes sense to purchase life insurance in case one of you should die. If the business loan is a 20-year loan, you will owe less in 10 years than you owe at the beginning. The death coverage of your life insurance should also decrease so you don’t pay for what you don’t need.
Decreasing term life policies are also used as “mortgage life insurance.” Over time, the principal amount of a mortgage decreases through monthly payments. The death benefit of the policy also decreases over time. If a homeowner takes out a $500,000 mortgage to buy a home, they need an equal amount of death benefit at the beginning. If they die and have a surviving spouse and children, the insurance would pay off the mortgage. However, by the time they have owned the home for 15 years, the mortgage balance is only about $339,000; there is no need to pay for $500,000 of death benefit at this point. Decreasing term mortgage cancellation policies are a practical solution since the policy will only cover the amount of the mortgage in the event of the insured’s demise.
Convertible term plans
Convertible term insurance plans allow the policy owner to convert term policies into permanent policies. The convertible feature is a great benefit because the policyholder will not have to qualify for the permanent policy. When the option to convert is exercised, there is no medical exam. This is great if the insured’s health has deteriorated over the years.
It’s important to note that once the policy is converted, the death benefit on the permanent life insurance policy will be the same as it was on the term policy. Also, know that the premiums will be higher on the new policy.
The benefit of convertible life insurance policies is that you can get the amount of insurance you need now at an affordable term life policy rate. You can always convert to a permanent life insurance policy when you are more financially capable.
What if you need life insurance for just a short period of time? Let’s look at the next type of term life policy.
Yearly renewable term (YRT) plans
YRT policies are short-term policies that are issued for one year at a time. At the end of the period, the insured can renew the policy.
In many cases, the policies have a guaranteed renewal for at least a specified time. Since the policy officially ends at the term, renewals are rated at the new age of the applicant. The premiums will then increase at each renewal.
Who needs a YRT plan? Take someone who has been working for a company, and their employer has provided life insurance. If they are separated from the company, they may lose their coverage. While they secure a new job, and if finances are tight, a short-term policy will make sure the family has coverage in the meantime.
How term life insurance works
Term life plans are an affordable way to protect your family in the event of your early demise. The policies are issued for specific term periods typically varying from 1 to 30 years. In the event of the death of the insured, the insurance company will pay out the face policy coverage amount to the beneficiaries.
The earlier in life you get your term life policy, the cheaper it will be. Young people are usually healthier, and the cost to insure you will be less. You can anticipate lower monthly premiums if you are young and healthy.
Insurance companies determine your premiums based on their assessment of the risk of insuring you. Factors that contribute to that risk, aside from health, are your hobbies and occupation. If you are a coal miner, you will have a different risk factor than a mall store clerk. If you sky-dive as a hobby, that will also be considered a high-risk activity, and your rates will reflect accordingly.
Benefits of term life insurance
There are some benefits that term life policies have over permanent policies.
Cost: This is one of the biggest advantages. If you compare term life rates against permanent life rates for the same set of circumstances, permanent life insurance costs will be approximately five times higher.
Flexibility: You can buy insurance for a specific period of time when you may have a specific need. You are not stuck with a permanent policy.
How much does term life insurance cost?
The cost of term life insurance, as with any other insurance, depends on many variables. We talked about health conditions, hobbies, and occupation being factors that affect rates. There is also age, gender, height and weight, and family history. All of these questions will be part of the screening process and will affect your life insurance rates.
How much life insurance do you need?
The amount of life insurance you will need will be based on your needs and other factors. You need to take into account what you are trying to insure against in the event of your demise.
Life insurance companies recommend that you get insurance coverage equal to six to 10 times your yearly salary. You want to get sufficient coverage, especially if you are the sole provider of the household.
Frequently asked questions
How long a term should I choose?
The length of the term you choose should cover enough to give you peace of mind that the needs of your beneficiaries will be met.
Typical term lengths vary from 10 to 30 years. If you are young with a family that depends on your income, you want to provide for them for as long as you deem necessary. There is no magic answer, and every family and every policy owner will be different.
What is the best term life insurance policy for me?
The best term life policy is the one that will cover the risks you need to insure against and gives you the coverage you need at a price you can afford. The flexibility of term life insurance makes it possible for practically anyone to have the coverage they need.
The best type of life insurance will depend on your needs for coverage, your health, and your budget.
What to expect when you apply for term life insurance
When you apply for any type of life insurance, you will need to complete an application. You will be asked to answer questions about your health and your family’s health history. In some cases, the insurance company may also require a medical exam.
The insurance company also wants to assess certain life habits, such as whether you exercise and if you are now or have been a smoker in the past.
Once the application is submitted, it will be submitted for underwriting. If everything turns out OK with your application, you will be approved, and the insurance policy will be issued.
What companies provide the best term life insurance policies in Canada?
When trying to choose the best term life insurance company, there are a lot of factors to consider.
Based on the premium rates offered, Manulife, Canada Life, and Foresters Financial would be among the top choices for the best life insurance.
One important consideration is the insurance company’s AM Best rating. Companies with AAA+ ratings from AM Best are the most stable and established companies.
Which is better and why: term or whole life insurance?
The answer lies in your needs at the moment and your future goals. Let’s look at some examples to give you an idea of which type of life insurance is best for you.
A term life policy is a good choice for a few purposes. It can be a good overall policy for a period of time or fill a specific need. Young people looking to get the most life insurance coverage right now would get the most out of term life insurance. The cost to insure is lower when you are young and healthy, so you can buy a much bigger policy at reasonable rates. You are also less likely to need a medical exam.
That is not to say that you wouldn’t benefit from a whole life policy at a young age. In fact, for the same reason – your age – a whole life, or permanent, life insurance policy may make sense. If you are looking to build cash value in the policy, starting out when you are young gives you an advantage.
In a whole life policy, part of the premium pays for insuring the risk, and a portion goes to build cash value. Young policy buyers have a smaller cost to insure them, so the cash value component of the premium is much higher than for older policy buyers.
In many cases, whole or permanent life insurance policies are also great options. The typical permanent policy buyer wants to cover their family or those that depend on them. They want to ensure their dependents have a safety net for as long as the insured lives.
Buying a whole life policy also allows you to accumulate cash value in the policy. This can be used as a living benefit, which many people don’t realize. Once you have enough cash value accumulated, you can take a loan against it to buy a car, pay for college for a young one, etc.
When you borrow from your insurance policy, you are borrowing from yourself. Any interest that is paid goes towards helping you increase your net worth. It beats having to pay the bank, and the interest rates are also better.
The type of life insurance policy you should buy is dependent on your goals and needs. The best approach is to speak with a professional who understands these products and can guide you to make the best choice.
Should you consider a term life policy?
Term life insurance is a very good option for many people. It is a very flexible product that can fill a number of needs at affordable rates.
Term insurance can be customized by choosing the type and length of coverage you need and the premium you can afford. You can also add policy riders that can give you additional benefits to give you the perfect coverage for your needs. Talk to an experienced insurance professional today and offer your loved ones the peace of mind they deserve with the protection they need.