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What Is Term Life Insurance?
Once you have
determined that you need life insurance, and calculated how much
coverage you require, you will have to choose between several types
of life insurance policies. There are two very different types
of life insurance contracts -- term and permanent.
Term Insurance Overview
Term life insurance is often referred
to as "pure insurance" because it involves only the
payment of a premium in exchange for a promise to pay a death
benefit in the event of your death while the contract is still in
Term life insurance provides
protection for a specified maximum period of time and is usually
renewable at the end of each period at progressively higher
premiums. As you get older, your risk of dying increases, so
the cost of term insurance goes up. Term insurance carries no
cash value element, making it less expensive than permanent
Annual Renewable Term
Annually renewable term (sometimes
called Yearly renewable term, YRT, ART) is an example of a term
insurance policy which has a constant face value and premiums that
are adjusted upwards each year to reflect the increasing probability
of your death in any given year.
Decreasing Term Insurance
Decreasing term insurance refers to a
type of annual renewable term life insurance policy with a
decreasing death benefit (face amount) and level premiums.
Decreasing term is ideal for insuring a liability that is gradually
being paid off, like a home mortgage.
Five, 10, 15, 20 or 30 Year Level Term
If you prefer, you may select a "level term" policy
which guarantees you a level premium for a number of years (usually
5, 10, 15, 20 or 30) and a level death benefit for the same
The longer the guaranteed term, the greater the initial premium,
but the longer the premium stays fixed. In most cases, if you
know you will need your term insurance for a long period of time, a
level term policy will prove less costly than an annual renewable
Permanent Insurance Overview
As the name implies, permanent (cash value) insurance is best
suited for the individual with a long term (often indefinite)
need. A permanent policy is really a combination of "pure
insurance" and an investment element. Premiums are
considerably higher than term rates in the beginning years, but may
drop significantly, or even disappear, in later years. Other
differences may include an increasing death benefit, a "cash
value" associated with the policy, and tax-advantaged borrowing
privileges against your cash value.