Learn About Term Life Insurance
Three of the most important factors to consider when learning about term life insurance are the types of policies available, how the premiums are determined and how the death benefit will be paid. The best policy for each specific situation will differ among individuals. For example, a young couple just starting out may want a policy that covers an outstanding mortgage, while an elderly grandmother may want a policy that pays just enough to cover final expenses. But learning about term life insurance is an easy process that can provide peace of mind for both the policyholder and his or her beneficiaries.
About Term Life Insurance Policies
There are two main types of term life insurance: Term life with an annual renewable term and term life with a level term. For consumers just learning about term life insurance, it’s important to understand the differences between the two policy types.
Term Life with an Annual Renewable Term
An applicant who selects this type of policy is purchasing term life insurance with a term length of one year. The premium paid to the insurance company covers the policyholder for one year only, and is based on his or her age at the time the policy is written. If he or she renews the policy at the end of the annual term, the premium will rise because he or she is now one year older. The reason the premium rises each year is because as the insured gets older, the risk to insurance company rises. With each year, the probability of the insurance company having to pay the death benefit increases. Term life with an annual renewable term can be cost effective for some individuals who wish to be covered for just a few terms. However, it can become cost prohibitive if renewed several years in a row.
Term Life with a Level Term
When reading about term life insurance with a level term, applicants will find that they will pay the same amount in premiums each year the policy is in force. In other words, a premium that does not increase as the insured gets older is considered to be level. If the length of the term is five years, the premiums will not increase during those five years. Likewise, if the length of the term is 30 years, the premium will remain unchanged. However, applicants should understand that the premium due would reflect coverage that will remain in force for a number of years. The lower cost of covering the insured in the early years would be averaged against the higher cost of covering him or her in later years.
About Term Life Insurance Premiums
Regardless of the type of term policy, it’s always wise to purchase life insurance at the earliest possible age. Age is most often the single most important factor when it comes to determining the cost of the premiums.
Other factors that affect the cost of term life insurance premiums are gender, tobacco use and personal medical history. While it often does not seem fair, men on average will pay more for life insurance than will women. From an actuarial standpoint, the risk of insuring men is greater than the risk of insuring women. The life expectancy for men is lower than that of women, and men are more likely to have more risk factors.
Tobacco use among either men or women will almost always increase the cost of a life insurance policy. In some cases, applicants who smoke may be denied coverage altogether. Quitting smoking is not only highly advantageous for one’s health, it will also likely reduce term life insurance premiums.
For individuals with a history of heart disease or diabetes, the premiums will also be higher. Even those with seemingly minor medical conditions such as high cholesterol or high blood pressure, or those who may have added a few extra pounds will usually pay more than applicants whose medical status is within a normal range.
The other factors that determine the amount of the premiums are independent of the applicant: The length of the term and the amount of the death benefit. Simply put, the longer the term and the higher the benefit, the higher the premiums.
About Term Life Insurance Death Benefits
The death benefit paid on term life insurance is the face value of the contract. Unlike permanent life insurance premiums, which have a cash component that compounds over time, term life insurance premiums cover the cost of the insurance only. When purchasing a term policy, the policyholder names a beneficiary to whom the death benefit will be paid upon his or her death. A policyholder can name the person of his or her choice, but the beneficiary is usually a spouse, child or other family member. Provided a person, not the estate, is named as the beneficiary, the death benefit will be paid tax-free under most circumstances.
The beneficiary can use the death benefit in any way he or she sees fit. One of the most common is to pay the funeral and burial expenses of the deceased. It can also be used to pay debt such as final credit card bills or car payments. Married policyholders will often choose a term policy with a death benefit large enough to cover the balance of a mortgage in order to ensure that the surviving spouse is able to remain in the family home. The death benefit can also cover up to several years of income so that a spouse and children will not suffer a loss in their standard of living should the primary income earner be lost.
Grandparents can also leave a legacy for their grandchildren by choosing a death benefit that will provide for a college education, the cost of a wedding or the down payment for a house. This type of inheritance can often be more valuable than stocks or bonds as the death benefit will not be taxed in the way financial investments would.
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