How Does Term Insurance Really Work?
A young man recently asked me to define term life insurance.
Because I have been in this business for almost all of my life it never occurred to me that there was anyone that would not know what term life insurance was all about.
For the edification of anyone who would appreciate it I am going to take the time to define term life insurance.
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Let Us Define Term Life Insurance
Term life insurance is life insurance in it’s purest form. There are limited loads in the premium. In most cases just enough to make sure that the insurance company does not loose their shirts.
In my attempt to define term insurance I want to make it clear that there is no such thing as a no-load life insurance policy. There are some premium loads in every life insurance policy which are used to cover the costs of issuing the policy. Term has very little…
- Yearly Renewable Term Life Insurance
Let us take a look at the yearly renewable term life insurance policy as we pursue our quest to properly define term life insurance. The intention of the designers of this policy was to create a one year term policy for each age.
The actuaries calculate the mortality costs taking into consideration all possible variables. They know in advance how many people at a given age are going to die in a particular year. They therefore can calculate how much to charge for a particular policy.
On renewal the following year the premium is increased because the life insurance risk is increased for that applicant just because he is one year older…
The yearly renewable term policy costs more each year you own it. The premium charged is a fair cost for the risk involved. The death benefit remains level for the duration.
- The 5 Year Level Term Life Insurance Policy
As I define term life insurance I must include this one. Let us look at the 5 year term policy then compare it with the yearly renewable term policy.
The 5 year term policy maintains a level guaranteed death benefit for 5 years. The premiums are also level for this period.
What is happening here is that the mortality costs as well as the administrative costs and the costs for an inspection report and doctors fees if a medical is needed are spread over a five year period.
The insurance company charges a level premium as a result. The same basic principle is used when calculating premiums for the 10 year term, the 15 year term, the 20 year term and the 30 year term .
To define term life insurance we therefore have to say that term life insurance is life insurance in it’s purest form.
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