Level Term Life Insurance [the Complete Guide]
With so many insurance companies trying to sell you a policy these days, and so many different types of life insurance policies available, it can be hard knowing exactly what you require. With this in mind, we have decided to create the ultimate guide to term life insurance considering this is perhaps one of the most popular policies that one can choose. Today, you will learn exactly what term life is, your options, and the different caveats in place so you aren’t left out in the cold should something go wrong!
What is Level Term Life Insurance?
Using the word ‘term’ quite literally, the proper life insurance definition for this type of policy is one that, once set up, only lasts for a set period of time. The main parties are the owner/insured and the insurer. A third party to the contract would be the beneficiary.
Term life insurance is considered “pure” life insurance because it contains no bells and whistles, such as cash value, but only offers a death benefit.
The owner/insured (we put them together because they are typically the same person, however, the owner and insured do not have to be one and the same) enters into a binding contract with the insurance company.
The contract extends for the duration of the level term (1 year, 5, year, 10, 15, 20, 25, up to 30 years). Once entered into, the only party that can cancel the contract early is the owner, either by outright act of canceling the policy or by failure to pay timely premiums.
The word “level” refers to the fixed premium payment and fixed death benefit for the duration of the term. Remember to read the fine print on your specific policy since some companies call its term life policy “level” but either the premium changes or the death benefit decreases.
With whole life insurance and other permanent life insurance policies, they will last up until the death of the insured but term life is limited, although term life typically comes with certain provisions that allow the policy to continue indefinitely, such as a conversion option and guaranteed renewability.
A conversion option allows the owner to convert all or a portion of the term into permanent insurance, such as whole or universal life, sometime during the duration of the term.
Guaranteed renewability is a provision in the policy contract that allows the owner to renew the policy annually upon the end of the initial term. Please note that upon renewal of the term life policy the premiums will go up or the face amount will go down.
Generally term is chosen by those who are younger, the costs are lower initially than permanent insurance but there is one downside – after the policy expires, the policyholder, who is now much older, must start again and find a new policy, which is likely to lead to much higher premiums.
Term life is one of the most popular options though because it is cheaper, easier, and just extremely simple. Rather than having to make a decision that will remain in place until you die, term life insurance allows you to pay a lower premium for a set period of time. For the duration of the policy, the premium will remain at the same level which secures a huge chunk of one’s life.
Types of Term Life Insurance
When deciding between term life vs permanent life insurance it is important to understand your options. In total, there are many different types of term life insurance but we will be focusing on the most popular options and the ones that we think you will benefit from the most.
Annual Renewable Term
Just as the name suggests, this is a regular term life insurance policy but the policyholder has the chance to renew every single year. This way, the death benefit can remain the same or it can be reduced over time compared to the very first year which can come in handy if you are only using life insurance as collateral to secure a small business loan.
Of all the options, this isn’t the cheapest way to go because the premium will increase every single year and your going to be a year older each time you renew. Over time annual renewable term is cost prohibitive. However, the increases will be small at first and at least you will be guaranteeing yourself coverage regardless. For those who like a little bit of control over their policy rather than signing their life away on a permanent contract, this can be a good decision but there is a more popular solution – level term insurance.
Level Term Insurance
With level term insurance you pay the same premium throughout the duration of the policy and the amount for which you are covered, i.e. the death benefit, will also remain the same. In other words, you get a guaranteed fixed premium and guaranteed death benefit.
As the policyholder, you will get to choose how long you need the policy to run and the insurance company will pay out the death benefit amount if you die within that time frame. Although some companies will offer something slightly different, most start at a minimum of five years and then move up in increments of five years right up to a maximum of thirty years. With options between 5-30 years for the policy, it can be good to find the right policy for you.
Considering the lump sum will be paid upon death, this is useful if you only have a certain amount of years left on your mortgage, for example. After choosing the duration of the policy as well as the fixed amount, you know that your family will receive enough to cover all expenses and bills thanks to the lump sum cash payment to your beneficiary upon your death.
Return-of-Premium (ROP) Rider
In the early 1990s, life insurance companies started to make changes to their policies and one of the biggest saw the introduction of the Return-of-Premium rider (ROP). With this rider in place, those who do not die will be entitled to recover the premiums that have been paid throughout the policy. Before this, those who outlived their policy would see no return and so a solution was required. If the death benefit is not paid, therefore, it lowers the risk and cost of life insurance making it more attractive and accessible to all.
However, there is a downside to this type of rider and it makes for great consideration – when the rider is added on to a regular term life insurance policy, the cost of premiums will jump significantly. In some cases, we could be talking a couple of hundred dollars per year which makes a huge difference. Therefore, it’s fair to say that we are looking at a cost/benefit assessment where both sides have to be weighed and considered before a decision can be made.
In truth, you are always best off talking to a professional in these circumstances because you will need someone who can assess your unique situation and find the best solution moving forward. For some, the Term Life ROP rider will be completely worthwhile but, for others, it may not work out so well because the extra cost per month and per year prove a little too much. Above all else, the timeframe will perhaps play the biggest role in making such a decision because it makes a little more sense to add an ROP on a 10-year policy than a long-term policy as it provides added protection.
Simplified Issue Term Life Insurance
Whenever the process of buying life insurance occurs, a medical exam will be necessary because the insurance company needs to know that their “investment” is safe. When someone is ill, the policy becomes more of a risk for the insurance company to offer such low rates. However, there is now an option where no exam is required and it is called ‘simplified issue’ insurance.
As a more basic and simple type of policy, simplified issue term life insurance requires no exam, blood draw or urine sample. You may be asked a few questions regarding your medical history and the history of your family but there will be absolutely no medical exam to take. With this in mind, the process is a lot quicker and you will be insured in much faster time from start to finish. As you can see, there are many benefits to choosing this type of insurance but there is one downfall – the price.
On the whole, simplified issue term life insurance is more expensive because the insurance company isn’t getting the full picture. With an exam in place, the provider will know everything about you to then suggest life expectancy but this cannot be achieved as well with no medical exam. With this added risk, the insurance company will increase their prices.However, with the advent of Big Data, we are seeing more and more companies offering very competitive no exam term life insurance rates. The key is to shop around with agencies that offer multiple no exam carriers.
For more on your exam and no exam term life insurance options please visit our life insurance quotes page to compare exam and no exam plans.
Term Life Insurance Riders
Earlier, we saw the ROP rider but it is important to note that there are many others that can be added to a term life insurance policy. Without further ado, let’s take a look at your main term life insurance rider options.
Currently, one of the biggest downfalls of a term life policy is that it will run out and you are left having to renew it some time down the line. However, the conversion option looks to solve this as it allows the policyholder to convert a term policy into a permanent one up to a point during the duration of the original term without the need for underwriting and any proof of insurability. At the point of request, your health rating will be used from the beginning of the policy and you can control how much is converted to a permanent policy.
For example, if you qualified at a preferred health rate class, then you will be allowed to convert to a permanent policy using that health rate class. The benefit being you will only pay premiums based on that health class and not a less advantageous health class, despite any sickness or disease that may have occurred after you obtained your term life policy.
Waiver of Premium
Should the policyholder become disabled in some way or maybe even ill, this rider ensures that premiums will be waived. Therefore, the policyholder is benefiting from the policy even when they aren’t able to work and make premium payments. While most cases will be temporary where the premiums will resume after things are back to normal, others can be permanent and this is especially the case if someone has been permanently disabled.
When a disability is experienced, it can have a huge impact on one’s life and the disability income rider looks to protect finances in a couple of different ways. Normally, this will depend on the insurance company, with some waiving the monthly premium, and others providing a 1% payment of the face value of the policy per month. For example, a policy with a face value of $100,000 would see the policyholder be paid $1,000 a month (1%). If the premiums are waived, this will be the same as we saw in the ‘waiver of premium’ rider.
If you work in a highly-dangerous environment where accidental death is potentially viable, this rider can be incredibly useful. Normally, it will be added onto the premium of the policy and will provide additional payment should the insured die from an accident – sometimes, this can be as much as double the amount, up to $500,000. Although the benefit will not be delivered when death is caused by illegal activities, hazardous hobbies such as motorsports and skydiving, and war, it will pay out for accidents at work, such as slip and falls, drowning, acts of God, and the like.
While the main reason to have a life insurance policy is to cover yourself or perhaps another in rare circumstances, the child term rider allows you to add your child to the protection. Essentially, this works in ‘units’ in that one unit will normally be worth $1,000 in coverage. However, the child must be younger than 17 to be added and remain thereafter. Although all companies are different, the average cut off point is normally 21 years of age, unless the child is in college and still a dependent.
The main advantage of a child term rider is that the price remains the same no matter how many children you have. In other words, if you have one child you pay the same price for the child rider as a family that has 10 children. For larger families, the child term rider is a great option and much better than buying individual coverage on each child.
Accelerated Death Benefit
Finally, we have the terminal illness rider or accelerated death benefit, what is commonly shortened to ADB, and it means that cash advances can be taken from the death benefit should the policyholder be diagnosed with a terminal illness. With this security, you will know that money can be accessed whenever needed in these circumstances.
There we have it, your complete guide to term life insurance. With this information, you can go ahead and choose the right type for you and even select additional riders!