Term policies issued for a fixed period of time may not have conversion options available at the end of that time. If they do have conversion options, it will be at an increased cost. Term policies may be either decreasing or level. These words refer to the death benefit provided. Decreasing term policies provide a reduced amount of coverage for the same premium cost at each renewal period. For example, let’s say you bought a $100,000 policy at age 35 for $200 a year. By the time you are 50 years of age, you will continue to pay $200 a year but the insurance coverage will have decreased to approximately $50,000. Decreasing term policies were once very common but have become rare as level term has become more competitive. With level term policies, the amount of insurance coverage remains the same over a period of time, however the cost of the insurance increases as you get older. Some policies have renewal periods in which the premiums change at each specified period. The premiums start very low at age 25 or 30 and increase at five year intervals for the life of the policy. A more popular version of level term insurance is one in which the amount of coverage and the premiums are fixed over a period of 10, 15, 20, or 30 years. This type of insurance is referred to as “fixed level term” and enables the individual to buy term insurance to fulfill their needs over an extended period. These programs usually are available in three rate classes: preferred, standard, and smoker. Preferred rates are the lowest and offered to those with the more healthy lifestyles while smoker rates are the highest for all age categories. Rate categories may vary from company to company and include additional categories of preferred like super-preferred, as well as ratings for certain occupations or hobbies. So what is the bottom line on term insurance? Generally, for a younger person term insurance is the least expensive form of insurance coverage. It is designed to furnish basic protection against the risk of death and is comparatively inexpensive when purchased at a point in life when the probability of death is low. Term policies do not include additional characteristics such as the accrual of cash value. While cash value is a useful feature contained in many types of policies, it can significantly increase the premium charge. 13–6. WHOLE LIFE INSURANCE. Unlike term insurance, which is intended to provide protection for a specified period of time, the purpose of whole life insurance is to provide protection for the duration of an individual’s life. It is called permanent insurance because the amount of insurance coverage and the premium charged generally remain
insurance, is to provide protection from loss by transferring the risk associated with that loss to someone else, i.e. the insurance company. With life insurance, the loss we are generally trying to protect ourselves from is the loss of income in the event of the death of a family provider. In addition to income replacement, life insurance is often purchased to pay expenses including home mortgages and estate taxes that may exist after the insured dies, as well as funeral costs. Many people may think that during tough economic times, life insurance is something that can be cut. However, life insurance is more important than ever in a bad economy since most plans offer guaranteed coverage amounts that are not dependent on the economy for performance. It is also important to note that death benefits from life insurance are not taxable under current law. 13–4. TYPES OF LIFE INSURANCE. The insurance industry offers an array of products, each designed to satisfy a particular requirement in the marketplace. In fact, the variety of products coupled with the unique jargon associated with the insurance industry can make the task of simply understanding insurance options a bit daunting. We will try to keep our discussion simple and straightforward. The three most popular types of insurance sold are term, whole life, and universal life. We will focus on these first, and then we will examine some of the other types of life insurance including variable, group, and multiple life policies. 13–5. TERM LIFE INSURANCE. Term life insurance offers protection for a stipulated period or term. The policy may be renewable annually, or it may be issued for a fixed period, say 5, 10, or 20 years. The face amount of the policy is payable only if death occurs within the period that the insurance is in force. Most term policies are sold with a renewability clause which allows the policyholder to successively extend the insurance coverage up to a specified termination point which is usually 65 or 70 years of age. Also, many term policies have a convertibility feature that allows the holder to exchange the term policy for another type of life insurance program. The renewability and convertibility features associated with term insurance can generally be implemented “without evidence of insurability.” This means that if an individual takes out term insurance when he or she is healthy and then becomes terminally ill, the renewal or conversion of the insurance cannot be denied based upon the current adverse medical condition.
CHAPTER 13: LIFE INSURANCE
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