All term life insurance policies have a limited duration. However, some policies are more flexible than others. Below are the main types of term policies you may come across.
Level Term Life Insurance
With level term life insurance, the death benefit remains the same the entire life of the policy. Common terms include five, 10, 15, 20, 25 and 30 years. Alternatively, a policy might last until the insured reaches a certain age, such as 65. The premiums will also remain constant throughout the term. Every policy aspect will be the same in its final year as in its first year.
Decreasing Term Life Insurance
With a decreasing term policy, the death benefit will decrease incrementally each year. Although your premiums will stay the same, the death benefit will be significantly lower in the final year than in the first year. This can be an economical choice if your main purpose is to cover a business loan or a mortgage since the balance of those loans will also decrease over time. Decreasing term policies cost less than their level term counterparts.
Renewable Term Life Insurance
With renewable term life insurance, you have the option to renew your policy when the term expires. This spares you the hassle of reapplying, which could mean undergoing a new medical exam. However, your renewed policy will likely feature higher premiums and a shorter term — often as short as a single year. A renewable term policy makes the most sense as a temporary measure until your health and income enable you to purchase a better policy.
Convertible Term Life Insurance
With convertible term life insurance, you can convert your policy from term to whole life insurance in the future. Typically, you can choose when to make this change, though some restrictions may apply. When you convert the policy, your new premiums will be based on your current age but your past health. Rather than requiring a new medical exam, the life insurance company will use the health information provided when you originally enrolled.
Return of Premium Term Life Insurance
Traditionally, policyholders who outlive the term of their life insurance policy do not receive any refund. However, some insurance companies now offer return of premium (ROP) insurance, albeit at higher rates than regular term policies. With an ROP policy, the insurance company will refund some or all of your premium payments if you are alive at the end of the policy term. As a result, ROP insurance can serve as both life insurance and a type of savings account.
Group and Supplemental Life Insurance
The group and supplemental life insurance provided by or purchased through your employer is most often a form of term life insurance. Rather than offering coverage for a certain number of years, these policies only last until you either leave or lose your current job. As a result, you may not want to rely on them as your sole source of coverage.
Typically, your employer will cover the premium for your group life insurance policy. You can pay for supplemental life insurance yourself if you want more coverage. These policies tend to cost less than other life insurance options, but the death benefit may not be enough to cover your full life insurance needs.
Mortgage or Credit Life Insurance
Mortgage life insurance and credit life insurance have a more targeted purpose than other policies. Rather than lasting a specific number of years, they remain in effect until the loan is paid off. As the loan balance decreases, so does the death benefit. In this way, they resemble decreasing term policies.
These policies do not require a medical exam, and you can wrap the premiums into your loan payments. Although they are meant to protect your spouse, business partner, or another cosigner or joint owner from having to cover the debt on their own, the lender is the beneficiary. The payout will equal the remaining loan balance and go directly to the lender.
