Term Insurance: Meeting a need for a "term"

Term life insurance is a great way to purchase a large face amount of life insurance that will cover the insured for a period of time, usually 10 or 20 years, although some companies also sell Term for 5 or 15 years. Term life usually requires medical underwriting, the extent dependent on the face value. There are several variations on Term Insurance along with reasons for choosing it—and reasons to consider other options.
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Variations

Level Term: Level term is the most common form of Term Life. It generally has a very low premium—determined by age, gender, and tobacco use—for a high face value of coverage. You can have the coverage for 10 or 20 years with most companies, and will have the option of renewing—for a much higher premium—when the initial period expires. If you have health issues, you can be "rated up" according to a risk table. If you are rated up, but are still offered the insurance, think very carefully before turning it down. A higher rating is recorded in MIB and can impact your ability to get insurance later.

Level term is good for protecting a young family, especially if one spouse is a stay-at-home parent who would be destitute if the primary wage earner were to die. It is also a good way to protect a mortgage. Most banks will accept life insurance in lieu of requiring mortgage insurance, and the life insurance is much less expensive. Term can also be used to protect children by means of riders. As each child reaches 18—or 21 in some states—he/she is offered the opportunity to convert the rider to individual whole life in the same face value as the rider. This conversion can be done without proof of insurability.

Finally, Term Life can be used to insure business partners or key employees, thereby giving the owner of the policy a way to fund replacing such individuals. For example, the owner of a logging company who has a high turn over of employees, but does not have enough employees to be required to pay workman's comp, could use term insurance on each employee. If the employee leaves, the insurance is simply dropped.
For small business owners, this can be less expensive than group insurance which usually keeps the same premium regardless of the employees who enter or leave the business.

Annual Renewable Term—also known as Yearly Renewable Term: Annual renewable term life is exactly what it sounds like—a life insurance policy that is renewed every year. Usually it is a conversion option from a level term that has reached the expiration date. The face value will remain level, but the premium will increase yearly; these increases become greater as the insured gets older.

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