Term insurance is also called pure life insurance and is popular life insurance that secures payment of a death benefit if the individual dies during a particular term. After the expiration of the term, the policyholder can either review the policy for another term or turn the policy into permanent coverage. You can also choose to terminate the policy altogether.
How Does Term Life Insurance Work?
When you invest in a term insurance policy, the company determines the premium based on the value of the policy, age, health, and gender. You may also need to go through a medical exam. Moreover, the insurance company may also inquire about your current medications, driving record, smoking status, family history, occupation, and hobbies.
If you die during the term of the policy, the insurance company will pay the face value to the beneficiaries. In most cases, the cash benefits are not taxable, and the beneficiaries can use it to pay medical costs, funeral expenses, debts, mortgage, etc. But if the policy expired prior to your death, there will be no payout. There is no value apart from the guaranteed death benefits. This type of policy does not have savings aspects like in whole life insurance policies.
Types of Term Life Insurance Policies
Term insurance policies by the company are offered in different types that include:
#1 Level Term Policies
It is among the common and simplest types of term insurance. In this, the sum assured remains fixed throughout the tenure of the term plan policy. Moreover, the benefits will be paid to the beneficiary upon the death of the insured.
#2 Increasing Term Policies
In such policies, the insured has the option to increase the overall sum assured annually during the tenure of the policy. However, the premium amount remains the same as it was in the beginning. This is the reason why the premium for these policies is higher than level term plans.
#3 Term Return of Premium Policies
Contrary to the basic term plan, these policies have maturity benefits. This means that the overall premium paid throughout the tenure will be returned to the insured if he or she survives the tenure period.
#4 Decreasing Term Insurance Policies
This policy is the exact opposite of increasing term insurance policies, wherein the assured sum continues to decrease annually to meet the requirements of the life insurer. This policy is generally taken by individuals who have taken a big loan or are paying regular EMI.
#5 Convertible Term Insurance Policies
These plans offer insured an option to convert the policy into another type of plan in the future. For example, if you invested in a term insurance plan for 25 years, but after ten years if you wish to turn it into a whole life insurance plan or any other plan, you can easily do it.
Taking a life insurance policy is non-negotiable these days, and term life insurance plans are among the best options. But when you invest in one, ensure to do your research well and choose a reputable provider.