How Does Term Life Insurance Work?
Term life insurance is a contract between the policy owner and an insurance company. The owner pays a premium for a specific term, and in return, the insurance company pays a specific death benefit to a beneficiary upon the death of the insured. Here are some key points to understand:
The Application Process
Before granting a policy, the insurance provider assesses how much of a risk the applicant is to insure. This involves a medical exam to evaluate health, and information about occupation and lifestyle. Certain hobbies and dangerous occupational environments may raise rates.
Choosing a Term Length and Death Benefit
It is important to choose a term long enough to see children out of the house and through college. The longer the term, the more expensive the monthly premium for a given coverage amount. It is generally better to get a longer-term policy than a shorter one. The death benefit should be enough to cover family needs if the policyholder is not there to support them.
Naming Beneficiaries
Beneficiaries do not have to be family members. They can include a trust, charitable organization, or friend. It is possible to give different percentages of the benefit to multiple beneficiaries.
Convertibility
Most major insurance companies offer a provision for term insurance to be converted to a permanent whole life policy later on, without having to undergo another medical exam. This is useful if the policyholder has a serious health problem or is attracted to the cash value component of whole life insurance.
Renewal and Cost
When a term life policy ends, it is necessary to either buy another policy at a higher cost or go without life insurance. It is possible to renew a policy on a year-by-year basis if it has a guaranteed renewal clause, but at a higher rate. Return of premium policies are available but are more expensive than regular level term life insurance policies.
Comparison and Choosing an Insurer
It is recommended to compare insurance rates from a few sources and consider the company being purchased from. It is important to look for a company with qualities such as financial stability and good customer reviews.
Term life insurance is a straightforward way to provide for family needs if the policyholder passes away. Properly assessing the need for coverage, choosing term length and death benefit, and choosing an insurer will ensure the best possible outcome.
