Buying Term Life Insurance

What Is Term Life Insurance

Term life insurance is pretty straightforward. One buys a  policy for a certain face value for a certain amount of time. The term can be as short as one year or as long as 30 years or longer. The premium and face  value of the policy remains constant throughout the term. At the end of the  term, one usually has the option to continue the policy, but at a significantly  higher premium based on the insured's current age, as opposed to his or her age  at the beginning of the term.

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Term is Temporary

Term life insurance is considered to be “temporary” life  insurance. While its premiums are often a fraction of comparable whole and universal products, it accrues no cash value and – by the very nature of its  term – does not guarantee lifetime coverage. Indeed well over 90 percent of  term policies issued in the United States lapse before a death benefit can be  claimed.

Shopping For Term Life Insurance

Virtually all life insurance companies offer a term product. In addition, virtually all property and casualty insurance agents are affiliated with a life insurance company or otherwise hold an appointment with one, often more than one, when buying life insurance

A life insurance policy application is usually filled out in the insurance agent's office, with the first month's expected premium payable  upon submission. At that point the application is provisionally “bound,” or put into force pending underwriting review. While the full face value may not be bound right away, this nonetheless provides the proposed insured with immediate  coverage.

Term Life Insurance Riders

Most insurance carriers allow a policyholder to modify their  standard boilerplate term policies with amendments called “riders.” Usually riders can only be added at policy inception, and often result in higher premiums. However riders often provide additional and very useful benefits.

Perhaps the most common rider on life insurance policies is the waiver of premium rider. This rider allows a policy to remain in force if the insured becomes permanently  disabled. The added cost of the rider is often negligible, but can be key to keeping a policy in force in the event of permanent disability.

Another common rider is the accelerated death benefit rider. This rider allows the insured to collect a certain percentage of the death  benefit while still living in the event he or she is diagnosed with a terminal illness while the policy is in force. This rider helps the insured to settle affairs while still alive and in turn can reduce estate and probate issues once the inevitable occurs.

The guaranteed insurability rider allows the insured to add additional term coverage without having to go through underwriting. This can be particularly useful if the insured acquires a medical condition after the policy is issued which would make obtaining new coverage through normal means very expensive or outright impossible. Many insurance companies impose waiting  periods and caps on coverage on guaranteed insurability riders.

A recent innovation in term life insurance is the return of  premium rider, or ROP. The premise behind ROP that it allows a policyholder to receive his or her premiums back if the policy is kept in force throughout the term. When the premium is returned it is returned dollar for dollar with no  interest, but  even that has advantages  over a traditional term policy, which has no cash value and is otherwise effectively nonrefundable. ROP policies are more expensive than traditional  term, but less so than a comparable whole or universal life policy. It may be a good middle-of-the-road option for an individual who wants a better financial guarantee that a traditional term policy can provide, but is hesitant to pay  permanent life policy prices.

Not all insurance carriers offer ROP, and several which did  in the past no longer do so. However, the option is still available given a bit of research.

Underwriting

As might be expected, underwriting requirements for term  life products vary according to face value and age of the proposed insured. These requirements can range from just a few health questions on an application to a full-blown physician-supervised physical including EKG. The latter is usually only necessary for high-dollar policies on older individuals. In most  cases when a physical is required a simple checkup and blood sample administered by a nurse is sufficient.

Often a policy may be issued as a “rated” policy, or at a rate table higher than the company's standard rates for an individual's particular age. This is determined in large part by the results of the physical. Different conditions are rated on different tables, and the rating  can result in anything from an extremely minor rate increase to a doubling of  premium or more. Conversely, particularly healthy individuals may receive “preferred” rates, or rates lower than the standard table.

Even if a policy is declined by underwriting due to health issues, it may still be possible to obtain coverage. Several companies specialize in issuing policies to higher-risk individuals. While the premiums are more  expensive the option is there. Only individuals with especially serious or terminal health problems are truly uninsurable.

Also bear in mind that certain products may not be available to certain individuals. Term products are often not available at all for minors (although permanent life insurance is, and often at very reasonable rates). Also, many companies will not issue longer-term policies to individuals 45 or over.

Policy Delivery

By regulation as well as convention, agents are required to  hand deliver a newly written life insurance policy. The delivery occurs when the insured signs a statement attesting to that fact. At that point the policy is considered issued and in full effect.

Most states have a “free look” law with respect to life  insurance policies. This means that a certain point after policy delivery, usually 10 to 21 days, one may return a policy to the insurance company for a full refund and without further obligation. These laws are in force to combat fraud issues that can surround less-than-scrupulous life insurance agents and  companies. Some companies offer free look periods longer than mandated by state law, up to 30 days.

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