What are the types of Term
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.
|Annual Renewable Term Life Insurance (ART)|
|Level Term Life Insurance|
|Decreasing Term Life Insurance|
|Return of Premium Term Life Insurance (ROP Term)|
|Lifetime Guaranteed Term Insurance|
Annual renewable term is life insurance
that covers an individual for a one year period at a
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
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.
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.
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 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
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.
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.
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".