What is a term policy?
Term insurance plans cover you for a term of one or more years, and it pays a death benefit only if you die in that term. However, even if you don’t die within the term, you have not wasted your money any more than when you buy car insurance but never have an accident.
You have bought yourself peace of mind that your beneficiaries will receive the death benefit if you should die within the term. Term policies typically offer the lowest monthly premium and are usually the best option if you have a limited budget or a temporary need. You can typically renew term policies for one or more terms even if your health has changed, however each time you do so; the premium may be higher.
There are four kinds of term policies:
- In level term policies, the death benefit amount will remain the same for the entire term. Depending on the policy, your premiums may be level or may increase over the term.
- Decreasing term policies have a death benefit that decreases over the term. Your premium will typically remain the same throughout the term. People who purchase decreasing term policies usually have financial obligations that decrease over time (such as mortgage payments or loans).
- Annual renewable term policies have a death benefit that remains the same throughout the term, but a premium that increases each year as you get older.
- Convertible term policies allow you to convert the policy into a permanent policy, typically without a medical exam or further underwriting. Generally, this does increase your premium payment and must be done before you reach age 65.