Explore the Different Types of Term Life Insurance Available: Level, Annual Renewable or Decreasing Term

Nearly every thinking person knows that life insurance is essential, not merely to pay for one’s burial, but to provide a family with an income in the event of a wage earner’s death, and to provide funds to pay bills. However, when people are out of work, one of the first things they tend to sacrifice is the life insurance. That could be a serious mistake.

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If your last life insurance policy was group term and you lost it when you lost the job (a common occurrence), you know that you need to replace it with something that is not tied to employee benefits, But what can you afford with an economy so uncertain? In this article we'll provide you with some suggestions on what to do as well as what not to do if you have recently lost your insurance—or if you never had any to start with.

Level Term Life
The most common type of insurance—because it is often relatively cheap is Level Term. This is a type of insurance for which you pay only the cost of insurance and annual fees. It is available in large face amounts. It does not accumulate face value and will only last—at the initial price—for 10 to 20 years.

If you are already working and have the ability to pay more than the price of Term, you should consider Universal. It is very reasonably priced, especially if you are young. A major advantage is that if in the future you should be unemployed, the cash value built up in a universal can be used to pay the premium and keep you from losing your coverage. Also, if the plan is structured properly, you don’t need to worry about the premium changing in later years.

Annual Renewable and Decreasing Term
Two types of Term insurance that you probably should avoid are Annual Renewable and Decreasing Term. Both of these are initially cheaper than level term, but that changes by the second or third year. Annual renewable term insures you for only one year. At the end of that year, the price will increase. The increases are not significant in the early years, but in later years, the cost becomes outright ridiculous. For example, we recently came across a “modified premium graded benefit term” policy that seemed to contain all the worst possible provisions in one policy. The “modified premium” was just a fancy way of saying “increasing” although in this case it increased every five years instead of every year. The “graded benefit” meant that the policy would not pay the full value for the first two years. Finally, it was Term to age 90, after which it simply would expire and not even be annually renewable. To add another twist, the policy was only for 10,000 and, if the client kept it to age 90, he would have been paying 199 per month in the last five years. A quick calculation revealed that if he kept the policy for the rest of his life and lived to age 90, he would have paid over $21,000 for a $10,000 term policy that could leave him with nothing. Don’t allow the urgent need for life insurance to misguide you into accepting such a policy.

Decreasing term is actually even lower priced than level term, and the premium does not change. What does change is the coverage. You may start with a high face value, but each year the coverage drops. In the last few years of the policy, you may actually pay more than your heirs would receive at your death. These policies were originally sold as mortgage insurance because the benefit would drop as your payoff did. However, the benefit decrease did not necessarily stay in step with your mortgage balance.

Bottom Line
If your money is tight, but you know you need insurance, settle for level term with a company that allows later conversion to either whole life or universal. This is one purchase you definitely want to get correct the first time.

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