All term life insurance policies have a limited duration. However, some policies are more flexible than others. Below are the main types of term insurance policies you might encounter.
Level term life insurance
With level term life insurance, the death benefit remains the same for the life of the policy. Common terms include five, 10, 15, 20, 25, and 30 years. Alternatively, a policy can last until the insured reaches a certain age, such as 65. Premiums will also remain constant throughout the term. Every aspect of the policy will be the same in its final year as in its first year.
Decreasing term life insurance
With a decreasing term insurance policy, the death benefit will gradually decrease each year. Although your premiums will remain 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 primary purpose is to cover a business loan or mortgage, as the balance on these loans will also decrease over time. Decreasing term policies cost less than their fixed term counterparts.
Renewable term life insurance
With renewable term life insurance, you have the option of renewing your policy when the term expires. This saves you from having to reapply, which could mean undergoing a new medical examination. However, your renewed policy will likely feature higher premiums and a shorter term – often as short as a single year. A renewable term insurance policy makes the most sense as a temporary measure until your health and income allow you to purchase a better policy.
Convertible term life insurance
With convertible term life insurance, you can convert your term insurance policy to whole life insurance in the future. Generally, you can choose when to make this change, although some restrictions may apply. When you convert the policy, your new premiums will be based on your current age but your past medical condition. Rather than requiring a new medical examination, the life insurance company will use the medical information provided during your initial registration.
Refund of term life insurance premiums
Traditionally, policyholders who outlive the term of their life insurance policy receive no reimbursement. However, some insurance companies now offer return of premium (ROP) insurance, albeit at higher rates than regular term insurance policies. With an ROP policy, the insurance company will refund some or all of your premiums 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 complementary life insurance
Group and supplemental life insurance provided by or purchased from your employer is most often a form of term life insurance. Rather than providing coverage for a set number of years, these policies only last until you quit or lose your current job. Therefore, you may not want to rely on them as your sole source of coverage.
Generally, 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 all of your life insurance needs.
Mortgage loan or borrower insurance
Mortgage life insurance and borrower life insurance have a more targeted purpose than other policies. Rather than lasting for a number of years, they stay in effect until the loan is paid off. As the loan balance decreases, the death benefit also decreases. In this sense, they resemble decreasing duration fonts.
These policies do not require a medical exam and you can incorporate the premiums into your loan repayments. Although they are intended to protect your spouse, business partner or other co-signer or co-owner from having to cover the debt on their own, the lender is the beneficiary. The payment will be equal to the remaining loan balance and will go directly to the lender.