If you are researching which type of life insurance to purchase, you might be wondering what the difference between term life insurance and permanent life insurance are. This article is to briefly describe how a term insurance policy works. If you have further questions regarding a term policy please feel free to contact us.
The majority of term life insurance policies are purchased as either 10 year or 20 year terms. Basically what this means is that your coverage amount (e.g. $1,000,000) and premium costs are locked in for that duration of time (e.g. 10 years).
As an example, we will use a $1,000,000 10 Year Term Life Insurance Policy for a 40 year old male, non-smoker in good health offered by Equitable Life Company.
For the first 10 years of the policy, the coverage amount will stay level at $1,000,000 and the premiums will be $55.97 per month. After the ten years, the insurance company will lock your rates in for another ten years at a very high cost with the same coverage amount. In this case, the monthly premium will be $55.97 for the first ten years and then increase to $475.20 per month for the next ten years.
As you can tell, the increase in price is substantial. The insurance company will offer you insurance after the first ten years without having to perform a medical or complete any type of health questionnaires. This is part of the reason for the large increase in price as they factor in that your health could change drastically in the first ten years of the policy.
A positive note is that if you still need coverage after the ten years and are in good health you can replace your old policy with a new ten year term policy (or other policy depending on your situation) at much lower premiums. This is typically what most of our clients do as they can avoid the large renewal cost after the first ten years.
20 year term life insurance policies work the exact same way as a ten year term, except that the death benefit and monthly premium costs are locked in for a longer duration of time. As a result, the premiums are increased to offer this advantage.
To compare to the example above, a $1,000,000 20 Year Term Life Insurance Policy for a 40 year old male, non-smoker in good health offered by Equitable Life Company is $101.19 per month. This provides the same coverage, but you pay a higher monthly premium as you will not have to worry about the increase in premium costs after the first ten years.
It is advised that you review your insurance policies every year at a minimum to ensure that you have the appropriate policy and coverage in place for you and your family. Everybody is in a different situation so we will need to assess your needs on an individual basis.
It is also important to review your coverage as we may be able to lock your rates in again at a lower premium with the same coverage. Contact us today, we are here to help.