understanding term life insurance

W H AT I S T E R M L I F E I N S U R A N C E ?

QUESTIONS AND ANSWERS ON LIFE INSURANCE

PRESENTS:

Created by the author of Questions & Answers on Life InsuranceTony Steuer, CLU, LA, CPFFE

By Tony Steuer, CLU, LA, CPFFE Visit: www.tonysteuer.com

AUTHOR OF:

TONY STEUER, CLU, LA, CPFFE


TONY STEUER, CLU, LA, CPFFE

• Author, Advocate and educator for insurance literacy

• Director of Financial Preparedness - United Policyholders

• Member: California Department of Insurance Curriculum Board

• Member: National Financial Educators Council Curriculum Advisory Board


It’s your money – monitor it, understand it, and know what you are getting for it.

All life insurance policies promise to pay an agreed sum of money to a beneficiary (or beneficiaries) upon the death of the insured person, as long as the policy is in-force (i.e. premiums have been paid on time). But, all life insurance policies are not the same.


A LITTLE RESEARCH CAN MAKE A BIG DIFFERENCE

Consumers who take a little time to research life insurance will increase their understanding and be better equipped to purchase a policy that meets their needs and their budget.

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MANY TYPES OF TERM ARE OFFERED

With over 1,500 life insurance companies in business, a wide variety of policies (contracts) are offered.

There are major similarities among the types of policies, due to state insurance regulations. These regulations create standards for each type of policy, regardless of which company is offering it. While Company A and Company B offer the same kinds of policies, there will still be differences and variations.

Be sure to ask questions and to verify that

the company has a good financial strength rating.

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The policy you choose should meet your unique needs

To determine how much life insurance you need and which type of policy best serves your needs, consider the following:

• The amount of income that needs to be replaced if the insured dies.

• The length of time that income will need to be replaced.

• Lump sum expenses such as funeral costs and taxes.

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Your Unique Needs, Continued:

Also consider these expenses:

• College expenses for surviving children. • Mortgages, loans and debts.

•Then consider:• The assets available to help with these needs.

As other assets grow, such as retirement plans and savings, your need for life insurance decreases. If these assets have not been developed, your need for life insurance increases.

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Term Insurance

• Term insurance is purchased for a specified number of years.

• The premiums are lower than those for permanent insurance. (Some companies are now offering guaranteed level premiums for extended periods, from 10 to 30 years.)

• The policy expires without any value at the end of the term.

• Most term policies cannot be renewed after age 75.• It is temporary coverage intended to meet a short-term

need.

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Permanent Insurance

• Premium payments usually (but not always) remain the same each year.

• The premiums are usually much higher than those for term.

• Premiums can stay level, and made more affordable when purchased early.

• Premiums can be discontinued later, under certain circumstances.

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Permanent Insurance, Continued

• The policy has a cash value (residual value) – sometimes called the cash surrender value.

• A long-term commitment is needed from the buyer, since little or no cash surrender value accumulates in the first few years (in most cases.)

• Access to the cash value is given through loans and withdrawals. Keep in mind that taking cash out will significantly affect your policy, so pay attention to the fees and interest charged - (click to read article on why a life insurance policy would underperform)

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Permanent Insurance, Continued

• Interest or other earnings on the cash value is tax deferred.

• Coverage may stay in place to age 95 or greater.

• Typical examples are: Whole Life, Universal Life, and Variable Life.

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Permanent versus Term

There is not a “one size fits all” solution. It depends on your individual situation. Term insurance is generally an excellent solution to a temporary need for life insurance coverage. When you are young with a growing family and limited budget, you will likely need a higher death benefit than you can afford.

Premiums are lower for term insurance than for permanent insurance

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Term + Permanent Insurance = ?

Combining the Two

Some companies offer a combination of term and permanent using a rider, or by giving you the ability to change types of insurance as time passes.

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Check Your Understanding of Term Insurance

• Term insurance usually provides the largest amount of death protection for your premium dollar.

• It is important that you check whether a policy can be renewed for one or more terms (even if your health has changed).

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Check Your Understanding of Term Insurance

• Each time you renew, the premium payment will be higher. This is called the re-entry term rate. Check the company’s premium schedule to see what those premiums will be for you.

• Check if the term policy can be exchanged for a permanent policy during the term period (called the conversion eligibility period).

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Types of Term Insurance:

• Annual Renewable Term (ART) features a premium that increases with each year with a level death benefit. Also known as Yearly Renewable Term, (YRT.)

• Level Premium Term features a level premium for a specified number of years (but may not be guaranteed to remain level). At renewal time, the premium goes up and remains level for the next term.

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Types of Term Insurance, Continued:

• Decreasing Term Insurance features a level premium and a decreasing death benefit. This is also called Mortgage Insurance when it is applied to the mortgage in the event of the premature death of the primary wage earner.

• Return of Premium Term allows the policy owner to receive the sum of premiums paid (sometimes with interest) after a certain term of years.

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Is it time to review your policy?

As time passes and your life changes, review your life insurance policy and make sure it is still working for you.

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Part 2: Permanent Life Insurance

To learn more about permanent life insurance

see Part 2 on the Life Insurance Toolbook

Slideshare channel.

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understanding term life insurance

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