Term life insurance comes in many
different flavors. We feel that
the more traditional Level term life is
the best approach but it's important to
know what else is available and
understand why level makes sense in
comparison. Let's take a look at
the different types of term life on the
most common type of term life is
level term life.
It's pretty straight forward and this
simplicity is it's real value.
This is also referred to as
Essentially, you pay a fixed and
guaranteed premium for a fixed period of
time with a fixed benefit. For
example, you may pay $40 monthly for 20
years for $500K of life insurance
benefit in the event of your passing
during that 20 year window. That's
it. Clean and simple.
The term periods usually range from 5
years to 30 years in 5 year increments.
This is the most common type of term
life available on the market and when
you run your term life insurance quote,
the rates and options reflected are
generally of level term. Let's
look at the other types of options which
usually affect either the benefit amount
or the term period.
Decreasing term life insurance takes
this basic structure of level term and
reduces the term life benefit amount as
the policy continues forward in time.
For example, the term benefit may be
$500K during the first 5 years, then
$250K during the next 5 years, and $100K
during the last 5 years of a 15 year
policy. This decreasing term would
be less expensive than the $500K above
since the benefit is decreasing but the
added complexity doesn't make sense.
First, you're assuming that in
years 11-15, you don't need as much
protection as the first 10 years.
That's a big assumption and anyone will
tell you that financial responsibilities
are known to decrease with time.
For example, if you have young children,
college might be approaching towards the
end of the term period. You're
making a bet that something would happen
earlier than later and we personally
feel that gambling and life insurance
are bad partners. For the
same amount, look at purchasing level
term life for a less amount...say $300K.
about the flip-side,
life insurance? This is
just a different bet...let's say red
instead of black. The amount of
benefit increases as the term period
progresses. For example, it might
be $100K the first 5 years, $250K the
next 5 years, and $500 the final 5 years
of a 15 year period. The problem
at its core is a replacement of income
over a long period of time. If you
pass away during the first 5 years, you
have $100K of protection to carry the
family for more than 10 years!
That's a bad gamble as well. The
whole point of life insurance is offset
risk not bet on which risk might occur
and which one might not.
are some other variations of term life
available on the market. Yearly
renewable term life is an example.
With this type of policy, the subscriber
can renew annually for one year blocks
of term life on a guaranteed issue
basis. This is really just
an attempt to dress term life in whole
life clothing. Very similar
to the wolf in sheep's clothing, there's
a downside in the form of a much higher
premium. This goes back to the
whole theory of why term life insurance
makes more sense than whole life as we
have addressed in our
whole versus term
term life and
articles. You will pay quite a bit
more for this ability to renew annually
and that money might be better put to
to age 65 or a fixed age (for example
70) is another hybrid between term and
whole life. Essentially, it's just
a core term life benefit but there's
usually a cash value element. As
discussed in the whole life versus term
article, this cash value benefit can be
only be won with extra premium that you
pay. You're paying a dollar to get
change back. Not the best of deals
unless you're the
company or selling agent.
Finally, another vehicle available is
Re-entry term. With this type of
life insurance policy, the
rates are lower but you have
to re-qualify based on health at
periodic breaks such as every 5 or 10
years. This is just another
gamble..gambling that you will be in
good health when the re-qualification
period comes up. For true peace of
mind, level term life insurance still
provides the best value and protection
in our opinion. If whole life is
over-insuring the risk, these hybrids of
term life go the other way with
potential risks built in by design.