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How Does Term Life Insurance Work?

Whole life insurance represents an underwriter’s open-ended commitment to pay out a pre-determined benefit in the event that a policyholder dies or cancels their policy. By contrast, term life insurance remains in force for a fixed period of time.

What Happens When the Policy Holder Dies?

If a term life policyholder dies during this set term, their policy’s beneficiaries will receive a fixed sum known as the “death benefit.” If they outlive their plan’s term, it will expire worthless and confer no such payment upon death.

How Long is a Typical Term Life Insurance Policy?

Most term life insurance policies remain in force for no less than 10 years. Although some life insurance companies use fixed one-year terms as the standard against which they set their premiums, the likelihood of a policyholder dying during any one-year period is quite low. As such, stand-alone one-year terms are exceedingly rare.

What are Annual Renewable Term Policies?

Annual renewable term policies, also known as “ART” plans, are form of term life insurance. These vehicles guarantee coverage for a fixed term, usually between 10 and 30 years. Since they are technically comprised of automatically-renewing one-year policies, their annual premiums rise slightly each year as their policyholders grow older.

Once their terms have expired, ART plans may be renewed. However, this may come at a significant cost: a given ART policy’s premiums may spike upon renewal to reflect the increased likelihood that its aging policyholder will die during the coming period. Accordingly, this form of insurance is best-suited for short-term use.

What is Level Term Protection?

Level term protection is the most common form of term life insurance. Level term plans lock in their policyholders’ premiums for the duration of their terms, which also range between 10 and 30 years. Since they don’t increase over time, initial premiums for level term policies will be higher than for their ART counterparts. However, they may be significantly lower by the time the policy expires. Over periods of more than five to six years, level term is more cost-effective than ART.

What is a “Return of Premium” Rider?

Because in many cases policyholders may receive nothing in return for their premium payments, some insurers offer return-of-premium riders, which can be attached to level term policies and allow insured parties to recoup their “investment”. These provide for the full return of premiums paid as well as the supplemental cost of the rider itself.

What Happens if an Insured Party Misses a Payment?

Term life insurance providers reserve the right to terminate or suspend a policy if the insured party repeatedly misses their payments. In the former case, the policy may simply expire early and offer no return of premiums. In the latter case, the insured party may have to pay the full value of their missed payments in order to renew their coverage.

Consider Using a Cost-Benefit Analysis before Making Your Decision

Although term life insurance seems like a gamble, it is often cheap enough to pass a basic risk-reward analysis. For instance, a healthy individual approaching middle age may be able to secure a 20-year level term life insurance policy worth $500,000 for less than $300 per year.

 

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Liran Hirschkorn

Liran Hirschkorn is the founder of Chooseterm.com. His mission is to help individuals across the country in finding the best rates on life insurance as well as helping individuals with high risk life insurance.

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