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Term Coverage

Term is short for ‘terminating’. This means that the coverage is taken out with the anticipation that it will end at a certain date. It tends to be the less expensive coverage and is meant to replace income. The opposite of term coverage is permanent coverage.

All About the Benjamins

Term coverage is most popular because it is low priced. Insurance companies are generally only provide term coverage to people who are likely to outlive the coverage. This is what makes the term coverage so inexpensive. The more likely you are to use insurance coverage, the more expensive it is to obtain. A young, healthy person will have the lowest cost coverage because they are likely to live the longest.

Pick a Term – Any Term

Term coverage is typically available in 10, 15, 20, 25 and 30 year increments. Some companies also offer longer term policies to 35, 40 or 45 years. The premium (amount you pay) and coverage amount (amount the company pays when you die) are fixed for the length of the term. If you take out a 10 year term policy, the amount you pay and amount of coverage will remain level (unchanging) for the length of the term.

After the term is over companies will often offer some sort of renewal of the coverage. Usually the rate will go up every year, sometimes the offer can include lowering the coverage amount. These offers are rarely attractive in price unless you’ve become less insurable over time.

Replace Your Income

Term coverage is often used to protect homes, education, and the other things income can buy. Income is the basis of term coverage. The insurance company will be worried about you being over insured. The amount of term insurance you can get is based on your income level and age. The two determines your future income potential.

Because of the income requirements for term coverage it’s unlikely people on disability or with income levels below minimums set by the companies. People in these kinds of situations are more likely to qualify for Guaranteed Issue or Burial Insurance policies.

As you age the amount of your income you can obtain coverage for decreases. As you age whole life becomes more attractive. People over the age of 50 should seriously consider whole life, especially if they have some serious health concerns.

Artificial Extended Term Policies

As of recent carriers have been using Universal Life (a flexible form of permanent insurance) to mimic longer term – term policies. These policies are not build to build cash value (like most permanent policies). They are designed to provide coverage until certain ages. Depending on the company, policies have been designed until age 85 – 121. It is called guaranteed universal life.

The main difference between this and a traditional whole life or universal life policy (designed to build cash value) is what happens if the insured outlives the coverage. Traditional policies designed to build cash value pay out when policy matures.

Here’s the way I often put it to clients: When you reach age 121 and the life insurance company pays out your death benefit what will you do with the money? Will you go to Vegas? Can I come with? You’ll have the best birthday party of your life. With that thought, why get a guaranteed universal life policy? Because for healthy applicants the coverage can be half the price of the traditional permanent policies. For the average insured the difference will be near indiscernible if all you’re looking for is the simple life insurance coverage. The average person will not live until age 121 and need the built-up cash value.

Watch the Conversion

Term coverage can be a way to establish your good health with the insurance company. Term policies can often be converted into permanent coverage in the future. Think about this. If you’re 40 years old and take out a 30 year term policy that allows you to convert before the policy is over. In your late 60’s you could potentially convert the policy into a permanent policy. By that age, you could have health problems that would make you less insurable (or quite possibly uninsurable).

Exam or No Exam

Term policies are available with or without an exam. Typically you will pay a small premium for a policy without an exam, especially when the no-exam company is more forgiving on the underwriting. There are certain times where no-exam policies are more cost effective than policies with an exam. Often complicated or serious health issues are better suited for a policy with an exam. Your advisor can help you navigate the options that are best for your situation.

Another benefit of no-exam policies is speed. policies with an exam can take significantly longer than no-exam carriers. Some no-exam carriers have express policies that can be approved as quickly as same day.

Conclusion

Term coverage is an incredibly useful tool. In the hands of an experienced advisor, it can be used to protect you during your most expensive periods of life. It’s convenient when you have young children, extensive debts, and are building your wealth.