What are the types of Term
Life Insurance?
There are several different types of term life insurance
policies including annual renewable term (ART), guaranteed
level term, decreasing term, return of premium (ROP)
term, and lifetime guaranteed term insurance. The most
popular term life policies are level term life, ROP term
and lifetime guaranteed term. Each type of term life
policy has its unique applications and advantages. A
description of each kind of term policy follows.
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Annual Renewable Term Life Insurance (ART) |
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Level Term Life Insurance |
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Decreasing Term Life Insurance |
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Return of Premium Term Life Insurance (ROP Term) |
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Lifetime Guaranteed Term Insurance |
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Summary |
Annual Renewable Term Life Insurance
(ART)
Annual renewable term is life insurance
that covers an individual for a one year period at a
guaranteed
rate.
At the end of each one year period, the policy can be
maintained but the premiums will increase to reflect
the new age of the insured. In most cases, annual renewable
term policies offer the absolute lowest premiums over
the first few policy years. However, as the covered individual
gets older, premiums will gradually increase and in a
very short time be more expense than other level term
options.
Once an ART policy is paid and in force, it is guaranteed
renewable meaning no proof of good health is required
to maintain the policy. With most companies, annual renewable
term policies can be renewed up to age 95. However, ART
premiums are generally cost prohibitive well before age
75.
Additionally, most annual renewable term policies offer
a conversion feature that allows the policyholder to
exchange a term policy for a permanent or whole policy
without proof of health. The conversion privilege protects
the insurability of the insured and is a valuable feature
when changing health issues affect an individual’s
ability to get life insurance coverage.
Annually renewable term insurance is best suited for
situations with very short-term needs of usually 2-3
years or less.
Instant Annual Renewable Term Life Quote
Level Term Life Insurance
Level term life insurance provides guaranteed level death
protection at a guaranteed fixed premium for a specific
time period. Level term life is the most popular form
of term insurance and is available in guaranteed periods
of 5, 10, 15, 20, 25 and 30 years. Policy costs are
based on the age, gender, lifestyle and health of the
insured as well as the length of the guaranteed level
term period. Because the insurance company is “on
the hook” for a longer period of time, premium
payments for guaranteed level periods of 20 and 30
years are higher than similar policies with guarantee
periods of 5 or 10 years. In fact, depending on the
insured’s age at issue, the cost of a 20 year
policy can be double the cost of a 10 year policy assuming
the same face amount of insurance.
At the end of the initial guaranteed level term period,
policy premiums will increase and in most cases increase
significantly. Once the level period ends, some companies
may offer the ability to lock in a new low rate for a
new level term period with proof of good health. In most
cases however, at the end of the initial level term period,
the policy becomes annual renewable term and rates increase
each year. As is the case with annual renewable term
insurance, most level term policies are guaranteed renewable
to age 95 and require no proof of good health to maintain
the policy. The real concern with level term insurance
is rate increases after the level period.
Conversion options are also available on level term insurance
policies. The conversion feature is very important because
it protects an individual’s insurability by giving
them options to extend coverage on a permanent basis
even with declining health. With most insurance companies,
the conversion period corresponds to the level term period.
Some of the more reputable companies have conversion
privileges to a certain age, for example age 75, no matter
how long the initial level term period.
Level term life insurance is most appropriate in situations where the insurance need is definite over a specific time period. Typical uses for level term insurance include income replacement, mortgage protection, and debt reduction, key man insurance for businesses, buy-sell agreements and business loan payoffs. Level term insurance should be used as a temporary bridge that provides the low cost protection during the period of need but can be dropped or expires at the point when the coverage is no longer becomes necessary.
Instant Level Term Life Insurance Quote
Decreasing Term Life Insurance
Decreasing term life insurance offers a fixed premium
over the life of the term period but the insurance
coverage amount decreases over that period. Decreasing
term policies have been popular in the past for covering
mortgage loans. Because the decreasing benefit could
be matched with a decreasing mortgage balance over
the life of the mortgage, decreasing term was ideal.
However, with the introduction of low cost level term
life insurance, decreasing term has become impractical.
In fact, most level term policies are cheaper than
decreasing term policies and do not have decreasing
benefits. For this reason, most companies no longer
offer decreasing term life insurance in their product
mix.
Return of Premium Term Life Insurance
(ROP Term)
Return of premium term insurance offers affordable
life insurance protection with premium guarantees and
a unique feature that returns 100% of premium payments
at the end of the level term period. Depending on the
insurance company, ROP term builds guaranteed cash
values in the early policy years that will equal the
total premiums paid by the end level term period. Cash
values may be accessed prior to the end of the level
term period but only percentage of premiums is generally
returned.
As you might imagine, premiums for return of premium
term insurance are significantly higher than level
term insurance premiums. With ROP term, insurance companies
charge a higher rate for life insurance protection
and use the excess premiums to earn a return over time
that will exceed the total premium payments over the
level term period. Time is required for the insurance
company to earn interest on these excess premiums.
Therefore, ROP term policies have minimum level periods
of 15 years but they are more commonly offered over
20 or 30 year level term periods. The longer the level
premium period, the more time the insurance company
has to earn interest on the excess premium payments.
Premiums on 15 year ROP term are usually very expensive
compared to the 20 or 30 year ROP term options.
ROP term insurance offers the same renewable features
and conversion privileges as ART and level term life
insurance. What is different about return of premium
insurance is that policy cash values are available
to fund the conversion of to a universal life or whole
life insurance policy.
Return of premium term insurance is also known as “cash
value term”. It is useful in situations where
the need for life insurance is temporary and the policyholder
is interested in getting cash back when the insurance
is no longer necessary. Many people do not like the
idea of paying for level term insurance which builds
no equity. ROP term insurance is ideal for those people
as the cost is significantly lower than traditional
cash value insurance policies but still offers a return
at the end of the level term period.
Instant Return of Premium Term Life Insurance Quote
Lifetime Guaranteed
Term Insurance
Also referred to as “term insurance to age 100”,
lifetime guaranteed term insurance offers a fixed premium
and death benefit for the life of the insured. Unlike
traditional term life insurance, lifetime guaranteed
term rates will not increase as long as the guaranteed
premiums are paid on time.
Lifetime term policies can be thought of as a “hybrid
policy” between level term insurance and traditional
whole life insurance. Premiums for lifetime guaranteed
term are cost effective like level term premiums but
the policy also offers the long term death benefit
guarantees associated with whole life insurance. Lifetime
guaranteed term insurance polices and lifetime guaranteed
universal life policies have effectively bridged the
gap between term life and whole life insurance.
Many lifetime guaranteed term policies are actually
universal life insurance policies with guaranteed insurance
benefits for life. While a small cash value may accumulate
in these policies, cash value growth is not an objective
of this insurance. The main purpose of lifetime guaranteed
term insurance is to “lock in” a low guaranteed
rate that can never be increased. As long as required
premiums are maintained, the policy will remain in
effect at the insured’s death. Lifetime guaranteed
term insurance is the most cost effective policy when
the goal is to guarantee coverage for life.
Instant Lifetime Guaranteed Term Insurance Quote
Summary
Term life insurance has many uses for many different
life situations. The type of insurance you need
will depend on your specific reasons for buying the
insurance.
Consulting with an independent insurance professional
to determine the exact policy need is likely
the best strategy to assure you select the appropriate
policy. To contact one of our independent agents,
please call toll
free at 1(877) 583-3955. For more
information on the type of life insurance
that meets your objectives see, "Choosing
the best term policy".
