When we use the phrase “term life insurance” it implies a single type of life insurance. But in point of fact there are different types of term life insurance – and at least six of them at that.
There may be more than six – certainly there are some custom plans out there for preferred customers in special situations – but below is a list of the most common types, and a description of each.
Level Term Life Insurance
When we discuss term life insurance, this is most commonly what we mean – level term life insurance. This is the most common basic type of term life insurance, and the one most people are familiar with.
Level term life insurance is exactly what the term implies. It is life insurance for specific term – which can be anywhere from 5 to 30 years – that is level with respect to both the death benefit and the annual premiums.
Convertible Term Life Insurance
Convertible term life insurance is a type of term insurance that can be converted into whole life insurance. It can be converted at the end of the term of the policy. This enables you to convert your term life insurance policy – which is temporary in nature – into permanent life insurance, which is what whole life insurance is.
This will enable you to retain your coverage for the rest of your life, without having to qualify for the policy based on your health condition. This is extremely important since you’ll be older at the end of the term of your policy, and could have certain health issues that would cause you to have higher premiums on the same amount of coverage. Convertibility removes both obstacles – age and health conditions.
Family Income Benefit
This type of term life insurance policy enables your death benefit to be paid out either in a lump sum, or distributed through regular equal payments to your family until the designated term ends.
This is sometimes referred to as a “spendthrift provision”. It eliminates the possibility that your beneficiaries might go through the proceeds of your policy shortly after your death, and be left with nothing to provide for them in subsequent years
Increasing Term Life insurance
This is term life insurance that allows you to periodically increase the amount of the death benefit of the policy. Not only will this ensure you of an increasing death benefit as the years go by, but it also gives you the benefit of the smaller policy early on when you can least afford it. Later on, when you’re in a better position financially, you can purchase more life insurance.
This will also avoid the problem of having to re-qualify for a new policy at an older age or with one or more health conditions, when premiums would be higher still.
Mortgage Term insurance
This is what is known as a decreasing term life insurance policy. The purpose of the policy is to pay off your mortgage upon your death. But since your mortgage amortizes and declines in balance, you will need less insurance coverage each year. The amount of your death benefit decreases each year with the decline in the balance of your mortgage.
The policies are relatively inexpensive, but the premium remains constant even as the death benefit declines. For this reason, this type of coverage is not always the most cost-effective in later years, when the death benefit is much lower.
Annual Renewable Term insurance
This type of term life insurance policy lets you renew the policy each year for the same or a lesser death benefit than what the policy was originally. Premiums will rise each year, since you will be older each time, but the issuance of the policy will be guaranteed regardless of your age or health condition.
This is not the most cost-effective type of term life insurance policy – since the premiums rise each year – but it will guarantee you coverage no matter what.
So there you have it, there are actually six types of term life insurance. When you are applying for a life insurance policy, check out each of these types of term life insurance. They’re generally more cost effective than whole life insurance, and each one can fill an important need in your life.
