Definition: Term life insurance – a life insurance policy that has premiums and coverage that are level for a predetermined period of time. Typically term life insurance policies do not have any investment attributes.
Examples would be 10 year term life insurance: premiums and coverage are level for 10 years). 20 year term life insurance has premiums and coverage level for 20 years.
Variations on term life insurance:
Def’n: Decreasing term life insurance: term life insurance with level premiums, but the coverage declines over time. This is often used to cover debt, such as a mortgage, as the amount of coverage is assumed to decline as the mortgage balance declines.
Definition: Renewable and convertible term life insurance – term life insurance with two additional features – renewable and convertible. The renewable feature means that the life insurance coverage continues at the end of the initial level term period. At that time the policy ‘renews’ (which just means the coverage continues) with the same face amount, but a substantially higher premium. Typically consumers would cancel their term life insurance coverage at that point. The structure of the renewal premiums vary from policy to policy. Some policies may have premiums that increase every year. Other policies may have premiums that increase every 10 years. The convertible feature allows you to exchange your term policy for a permanent life insurance policy without a medical exam. This is commonly used if you become uninsurable and decide that you now want life insurance coverage forever. It’s also a common practice to convert to a smaller permanent policy (i.e. $50K or $100K) at the end of the initial term as an easy way to get a final expense policy.
Term life insurance policies are generally both renewable and convertible, or neither renewable or convertible, i.e. these two attributes are generally found together and not offered individually.
If you’re seeking the ‘best’ type of term life insurance, you should generally choose an initial term (i.e. 10 years, 20 years, 30 years) that matches well with how long you need the coverage for (and assume that after that time period, that you don’t need the life insurance). Also you should always choose a renewable and convertible policy – be careful when you’re purchasing online because while most term policies will be renewable and convertible when purchased through an individual broker, many online policies are not renewable and convertible.