Reader Question: Are there different types of term life? If so, are they all pretty much the same kind of policies? Is there a term life product called ‘mortgage life insurance?’
There are different types of term life insurance, and in addition to other types of term life policies, there is a mortgage life insurance product.
Term life insurance provides coverage for a defined term, and doesn’t have cash value. In general, a term life insurance is a pure insurance where the premium paid by the policyholder protects the beneficiaries against any financial consequences that are caused by death only.
When buying term life insurance, you need to take into consideration the face amount, the premium, and the length of the coverage. Different insurance companies sell this type of insurance in various combinations of the three factors. Some sell insurance with face amount remaining constant or declining. Mortgage, renewable, annual, and level are the common types of term life insurance.
Level term policy: This type of policy requires payment of a fixed period for the duration of the term insurance policy. Common terms include 35, 30, 25, 20, 15, 10, and five years. A person usually buys level term life insurance policy for asset management and long-term planning because premiums do not increase or decrease which allow for long-term budgeting.
Renewable or convertible: Some policies are renewable or convertible at the end of the term. When the term insurance is with guaranteed renewal, the insurer promises that it will issue another policy whether or not the policy holder is insurable or not. Although most insurance companies do not offer guaranteed renewal, they opt to offer a conversion option that permits the policyholder to convert the policy to a permanent life insurance policy which will induce the policyholder to pay higher insurance premiums. When buying term insurance, you need to know about these options prior to buying a term insurance policy.
Annual renewable term: This variation of term life insurance is a one-year life insurance policy wherein the insurer guarantees issuance of a policy which is at least the same amount as the original policy regardless of the policyholder’s insurability. The premium can vary depending on the policyholder’s age.
Mortgage life insurance: This insurance typically has a constant premium, but the face value of the policy is declining because this type of policy is drawn to equal the mortgage amount of the policyholder’s property. With this kind of term insurance, the insurer will pay for the mortgage in the event of the policyholder’s death.
Unlike whole or universal life insurance, term life insurance does not offer tax benefits or cash-value build up. This type of insurance is for people who need to have life insurance, but can’t afford to pay high premiums. In order to find out if the term life insurance is the best policy for you, consider these factors as a starting point:
- You’re still young and in good health
- You’re looking for a straightforward, simple, and low-cost insurance policy to protect your beneficiaries
- You can’t afford other expensive life insurance premiums
Once you’ve decided that term life insurance is for you and have chosen a policy, the policy is typically in force by the time you pay your first monthly premium, and generally makes a fast, easy process. Despite common sayings like “buy term, invest the rest,” sometimes term life may not be the best choice for you, but at least within term life, you have different term life insurance product options.