Individual Term Insurance Policies

Individual Term Insurance Policies

Life Insurance: Providing Security for Your Survivors

Individual Term Insurance Policies

There are several types of individual term life insurance:

Annually Renewable Term (ART)—This is the most common form of term insurance and can be renewed at the end of the term (one year) without evidence of insurability. Rates increase at each renewal as the age of the insured increases. You pay a premium for the "term," which is one year. These policies are generally convertible and renewable to age 70. Once you are insured, the company must pay a death benefit as long as you pay the premium.

Level Term—With this type of term policy, the premium stays level for a specified period. The annual premiums may be initially higher than an annually renewable term policy, but may be lower over the period of time you intend to hold it. Be careful, though: while the premiums during the initial period are generally low, they can jump substantially once the term expires.

IMPORTANT NOTE: If the policy is not convertible and you are in poor health or uninsurable at the end of the 5-, 10-, or 20-year level term period, and you still need insurance, your term insurance premiums may be prohibitively expensive once the level term period expires, and you may not even find a company that will insure you.

Re-entry Term—This type of policy allows you to renew at a "preferred rate," which may be lower than a standard level term policy. To qualify for the policy at the preferred rate, you usually have to fall within the underwriting limitations for height and weight, health, and smoking status; sometimes there are even financial requirements.

IMPORTANT NOTE: While the premium is scheduled to remain level, the insurance company may only guarantee the rate for the first five or ten years, depending on the policy.

Here's the catch: At the end of the level term period, you are required to provide evidence of insurability in order to "re-enter" the policy at the "preferred rate."

IMPORTANT NOTE: While the "re-entry or preferred" rate is very attractive, you will find yourself paying substantially higher rates if you can't re-qualify at the end of the level term period. If you don't like to gamble, make sure the length of the initial level term period equals the amount of time that you intend to keep the insurance.

Decreasing Term—In this type of policy, the face amount of insurance decreases while the premium remains level. Decreasing term policies are most commonly sold as a form of mortgage insurance, whereby your insurance coverage decreases over the life of the mortgage.

IMPORTANT NOTE: Because the insurance decreases while the premium remains level, this type of term insurance tends to be more costly the longer the policy stays in-force. It is generally not recommended.

Narrowing the Playing Field When Searching for Term Insurance

There are several factors to keep in mind as you shop around for the right term life insurance policy:

  1. Comparing policies. Every policy illustration or "quote" you receive should have a "net payment" index at the end of the illustration. A life insurance illustration is not the actual contract: it is simply a computer-generated sheet that shows both the current and guaranteed schedule of premium payments by age. The "net payment" index is an interest-adjusted formula that allows you to compare term policies among companies. The lower the number, the less expensive the insurance, assuming you keep it over the stated period. The formula is not perfect, but it is an industry standard. Make sure you are comparing quotes of people of the same gender, age, and status (preferred, standard, smoker, non-smoker, etc.).
  2. Renewability. Make sure the policy issued is renewable for the length of time you'll need insurance. A policy that is issued as "renewable" cannot be canceled if your health should worsen. If you're young and think you'll need the insurance until you retire, don't buy a policy with a term of five or ten years. You may find yourself unable to purchase insurance in the future if your health should deteriorate. If you're thinking of purchasing a "re-entry" term policy, make sure it is renewable after the initial term.
  3. Convertibility. If you are buying term insurance, particularly when you're young, you may have a need to purchase or "convert" to cash-value insurance as you get older. If your policy is convertible, it means the company will offer you a cash-value policy without further evidence of insurability. Your conversion status is typically the same as the status of your existing policy. Be careful: some companies limit the age for conversion.

IMPORTANT NOTE: Converting your group term insurance to a cash-value policy may not be your best bet. If you're a non-smoker in good health, have your life insurance company, or any life insurance company, issue you a new cash-value policy and underwrite you by fulfilling the medical requirements. You'll usually be eligible for lower rates.

  1. Premiums. The amount you pay can vary widely from company to company. Term premiums are calculated differently based on the type of policy. Policies may be participating or non-participating. Participating policies earn dividends, which can help you reduce the scheduled premium increases. Non-participating policies do not pay dividends, but their scheduled premiums are projected to be lower than their guaranteed premiums. One way to compare policies is to look at the company's guaranteed premiums, just in case the company needs to increase its scheduled premium or lower its dividend scale. Regardless of the company's experience, you can determine the worst case scenario.

IMPORTANT NOTE: When comparing policies, make sure there are no riders attached to the policy. You want to compare apples to apples, and riders can be priced differently.

  1. Number of policies. Don't think you'll be able to get it cheaper if you buy two individual policies rather than one large policy. First, the larger the face amount, the lower the cost per thousand dollars of life insurance. Companies band their premiums usually between $100,000 and $249,999, $250,000 and $499,999, and upwards. Second, many companies charge a policy fee in addition to the cost of insurance.

SUGGESTION: Try to buy one term insurance policy to cover all your life insurance needs and keep your costs down.

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