Term life insurance is similar in many respects to the automobile or fire insurance contract because the premium is paid for protection for a given period of time. There is no return on that premium unless the event insured against occurs.
For example, the fire insurance policy pays only if the insured property is damaged by fire during the contract period. Likewise, the term life insurance policy is payable only upon the death of the insured during the contract period.
Coverage of Term Life Insurance
In both cases, coverage ceases at the end of the term or contract period unless the insured renews the policy. Both policies are temporary forms of insurance. As stated in the last chapter, the price of term insurance is based upon the mortality curve.
Since mortality increases over time, the cost per thousand of one-year term insurance increases each succeeding year. Level term contracts for five, ten, fifteen, twenty, or more years usually incorporate a level premium for the entire contract period based upon a weighted average of premiums.
While no term contract has a cash value at its termination date, the longer-term contracts do involve some cash value accumulation which disappears by the end of the term.
Term insurance, then, is characterized by its temporary nature, its lack of cash values, and its relatively low cost. It is the least expensive form of insurance in that a given dollar of premium will purchase a higher face amount than for either whole life or endowment insurance. One of its major disadvantages is that it is generally not available past the age of 65.
Uses For Term Insurance
Although there are many uses for term insurance, it is perhaps best used in two situations:
(1) when the need is only a temporary one and
(2) when the need is permanent but the insured temporarily cannot afford the higher cost of permanent insurance. In the latter case not only is adequate insurance provided, but the insured protects his insurability.
Decreasing term insurance, a widely used variation of term insurance, may be utilized either by itself or as a rider attached to other forms of insurance.
Mortgage redemption insurance, for example, is a form of decreasing term in which the contract issued to the insured corresponds with the length and outstanding balance of the mortgage. The amount of insurance decreases at the same rate as the balance of the outstanding mortgage.
Thus the insurance contract will pay off the mortgage if the insured dies before the mortgage debt is satisfied. This will leave the insured’s family with a mortgage-free home. Any large debt liquidated in installments can be similarly insured.
Term insurance also can be used by young persons who need a substantial amount of insurance yet do not have adequate income to afford the premiums for permanent forms.
The Renewability and Convertibility
By including contractual provisions which guarantee both renewability and convertibility, the insured, while perhaps able to pass a medical exam and meet other underwriting requirements at the time he takes out the policy, assures himself that he will be able to obtain needed insurance at a future date when he perhaps could not pass such medical exams.
The renewability feature allows the insured to renew his term policy at the end of the policy period without showing the status of his health, occupation, morals, etc.
The premium will be higher at the renewal date, however, and the number of renewals is limited. The convertibility feature permits the insured to surrender his term policy in exchange for a permanent form of insurance at any time during the policy period or at certain specified times without demonstrating insurability.
Of course, if the insured does convert at a later period, he normally will pay premiums based on his age at the time of conversion (i.e., his attained age), which obviously would be higher than if he had bought the permanent insurance at the outset.
While the renewability and convertibility features raise the cost of term insurance, they are recommended if term insurance is being used temporarily in place of permanent insurance, because without these features the policyholder may be uninsurable at the expiration of the term period. In any case, term life insurance is generally not available at advanced ages.