What’s the most common, basic form of life insurance? Most financial experts and mavens will tell you it’s a term life insurance policy.
That’s because term life insurance is simply the purchase of death benefit protection over a specific period of time. For example, with a 20-year $500,000 term insurance policy, your family or other beneficiary gets the financial protection of receiving $500,000 should you pass away during the 20 year term. Nothing more, nothing less.
That would seem to suggest a term life insurance policy is pretty much the same across the board. Right?
The value and facility of a term life insurance policy can vary widely, depending on:
- Features offered and chosen for the policy itself.
- Provisions for renewing or converting the policy.
- The issuing company.
To understand these variances, it’s first important to understand the difference between term life insurance and permanent insurance.
Permanent insurance, which includes whole and universal life insurance, covers a lifetime and not just a specific period or “term” of time. That means there is the protection of a death benefit even in old age or declining health. Permanent policies also typically allow for the accumulation of cash value and sometimes the opportunity to earn dividends. (Related: Understanding permanent insurance)
Because of these added features, permanent policies tend to cost more than term life insurance. So many people, especially those starting out in life, tend to look at term policies first. (How much would it cost you? Get a quote)
But term insurance itself can come in different varieties and sizes. The length of the term can range from five to 30 years, generally. And the size of the death benefit can vary widely as well.
In addition, some life insurance companies will allow “riders” ― contract provisions that allow for certain added features in exchange for a higher premium ― to be added to term policies. For instance, a “return of premium” rider could be attached that would allow for money to be returned to the policy owner at the end of the term, something that normally wouldn’t happen at the expiration of a term policy.
Paying, renewing, converting
The length of the term and the amount of the death benefit obviously will influence the size of the premium, as will any riders added. So will the age and health of the purchaser. The Insurance Information Institute notes that some insurers will not issue policies for a term that will end after an applicant’s 80th birthday.
Term policies can also come with different premium payment options. For example, some could contain provisions providing for “level” premiums, where the payment remains the same, for a certain number of years, then increasing in subsequent periods.
Or, a policy could be “annually renewable,” where the premiums increase each year. How long the offer to renew the policy is available will vary from insurer to insurer.
Term policies can also come with provisions or riders allowing some or all of their policy value to be converted into a whole life or another type of permanent life insurance policy. This can be especially important for consumers who planned to use a term life insurance policy as a way to secure the broader advantages of permanent insurance later in their careers. (Calculator: How much life insurance do I need?)
“A term conversion option is valuable in the sense that it allows you to lock-in future coverage if someone’s health deteriorates or they see an increase in cash flow,” said Douglas Collins, a financial planner at Fortis Lux Financial in New York, NY. “The term conversion works best for someone who needs coverage now, is aggressively paying down debt for one to three years, then can divert those debt payments to a whole life policy.”
And there are some important options to consider as well.
A waiver of premium rider will pay premiums in the event you become disabled and are unable to work. How disability is defined may also be important. It is also important to know if you can convert to permanent coverage while disabled, and will the premium on the permanent policy be waived while disability continues?
But the provisions and costs of such conversion, again, will vary from insurer to insurer. For example, one company may offer very low cost term insurance options, but charge more for converting into a whole life policy. Another may offer term insurance at a slightly higher premium, but offer more favorable terms for conversion to permanent insurance.
The right company
This is where the choice of insurance carrier comes into play.
Sure, lots of companies offer various types of term life insurance. But the features and flexibility of those term policies will vary from company to company. And, when it comes to conversion, the range of permanent insurance policies available as well as conversion terms will vary from insurer to insurer as well.
And not to be forgotten is the financial strength and track record of the insurance company itself. Insurance is a long-term commitment. You want a company that has the security and history to meet that commitment (MassMutual was established in 1851 and its most recent financial ratings can be found here).
So in the end, term insurance has plenty of differences from company to company that make it wise to compare beyond the basic price. Payment terms, extension and conversion options, and the company’s stability all can add or detract from the ultimate value of the policy. That makes it wise to shop around or talk to a financial professional about options that make sense.
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This article was originally published in July 2018. It has been updated.