Term Life Insurance

Annual Renewable Term Life Insurance is the simplest form of term life insurance. It is generally issued for a term of one (1) year. The death benefit would be paid by the insurance company if the insured dies during the one-year term. Future premiums are then based on the expected probability of the insured dying the following year. This policy renews annually with a premium increase.

Level Term Life Insurance: Much more common than annual renewable, term insurance is guaranteed level premium term life insurance. The premium is guaranteed to be the same for a given period of years. The most common terms are 10, 15, 20, 25, and 30 years.

In this form, the premium paid each year remains the same for the duration of the contract. This cost is based on the summed cost of each year’s annual renewable term rates, with a time value of money adjustment made by the insurer. Thus, the longer the term the premium is level for, the higher the premium, because the older, more expensive to insure years are averaged into the premium.

Most level term programs include a renewal option and allow the insured to renew for a maximum guaranteed rate if the insured period needs to be extended. It is important to note that the renewal may or may not be guaranteed and the insured should review their contract to see if evidence of insurability is required to renew the policy. Typically this clause is invoked only if the health of the insured deteriorates significantly during the term, and poor health would prevent them from being able to provide proof of insurability.

Most term life policies include an option to convert the term life policy to a Universal Life or Whole Life policy. This option can be useful to a person who acquired the term life policy with a favorable rating class and later is diagnosed with a condition that would make it difficult to qualify for a new term policy.