Term life insurance is the simplest of all insurance. The insured selects a coverage amount and defines how many years the policy will be maintained. This time can range from one year to 30 years. If an insured chooses a term of 5 years, when it expires, they may need to renew the policy, change it or let it pass.
This type of insurance is prevalent in cases where you need protection for a specific time. For example, when your children are young, while you are paying the mortgage on your house, or until you have the savings that allow you to leave your family “affluent” without the need for insurance. So when the condition no longer exists, you can choose not to renew the insurance, saving you premium payments.
One of its significant advantages is usually the price since you buy the insurance for a specific period. The premiums are generally the amount that the insurer needs to cover the cost of your policy, and there are no additional charges for a substitute for the future price of the insurance.
Although it also has a significant disadvantage, and that is that many times the need for insurance protection is maintained indefinitely, even if you have only taken it for a few years. For example, if you bought insurance for 20 years because you thought that by that time, your house would be paid for or your children would no longer be your responsibility. But you realize that by the time your insurance expires, none of both things have happened (because you had to refinance your house several times or children were born later than planned, and they are still at home). It could happen that after 20 years, when you want to renew the policy, the cost of the new insurance is prohibitive, or you have become ill, and by then, you are not “insurable.”
For the rest, you can have several insurance policies simultaneously so that when one expires, another one is left, and so on. The most common term life insurance terms are:
- One year, renewable every year
- Five years, renewable
- at ten years
- at 15 years
- at 20 years
- at 30 years
- Up to a specific age (65 years old, 70 years old, etc.)
The popularity of each type of term insurance varies from time to time. A few years ago, the most popular policy was renewable per year; but it is no more. Today the most popular approach is 20 years. However, these policies are complicated and expensive to obtain for people over 80 years of age.
There are other universal term policies such as level policies, those in which the insured amount does not vary over time. However, sometimes the insured prefers to have a more significant amount of insurance or protection in the first years and lower the coverage over the years. The latter is known as declining term policies because they estimate that their financial means will be able to cover part of the insurance needs that they cannot protect themselves at the beginning of their professional life.
These policies could start, for example, with a coverage amount of 100,000 dollars and in year five drop to 90,000, in year ten drop to 80,000 and thus continue to drop every few years of validity. The exact price could be less than that of the level term policies.
Renewable or not?
Another significant value of term policies is that they can be renewed ( renewable ). If a policy were non-renewable, at the time it expired, the insured would have to show that they are still eligible for new insurance and would most likely have to undergo a new medical exam. If the policy is renewable, the insured avoids the medical exam and the possibility that her health has deteriorated. She will no longer be eligible for the same insurance she had when he initially obtained the insurance a few years ago.
Do not confuse the possibility of renewal with fixing the price of the premium. When it is guaranteed that a policy is renewable, it is said that there is no need to do a medical exam again. But this does not generally ensure that the premium continues to cost the same since, in the end, the insured has aged and by the law of life is more and more likely to die; therefore, the insurer’s risk increases over the years, as does the amount of the policy.
In reality, the policy’s price is based on the age, gender, and health status of the insured and the risk that the insurer takes with said policy and the time of the insurance. For example, a 25-year-old woman will pay for a less expensive policy than a 65-year-old woman, even though both appear in good health. If you choose 5-year (renewable) insurance, it will cost you less than a 30-year term policy.
When in 5 years the woman is no longer 25 but 30 years old, she will pay the premium corresponding to a 30-year-old woman, even if the policy is renewable.
Another option for the insured when the term ends is to convert that term policy, which ends x years after it is issued (in five years), into another type of insurance, such as permanent ones.
In this case of conversion, the applicable premium will be determined by the insured’s age. Since it is a conversion, it will not be necessary to carry out new medical examinations.
What is a return-of-premium policy?
Hundreds of thousands of people find it necessary to have insurance, even though they feel dissatisfied with paying year after year for insurance that expires from time to time. Nobody wants to have had to use it because it would mean that the insured person has already died.
For this reason, the insurance industry has devised a new type of insurance in which it is guaranteed that the term of the insurance expires. And they have not had to use it (since the insured is still alive and their beneficiaries have not received any compensation). The insurer will return the money paid in annual or monthly premiums; Of course, this guarantee will have a substantial surcharge on the life insurance premium.