rain umbrella insurance

Term Insurance

As long as the insured pays the premium, the policy remains in force.

With an annual renewable term (ART) policy, the death benefit stays level but the premium increases every year. As long as the insured pays the premium, the policy remains in force. The policy illustration (or the policy itself) shows a “current premium” and a “maximum guaranteed premium.” The current premium is what the carrier is now charging and expects to charge for the coverage. The maximum guaranteed premium is what the carrier is contractually able to charge for the coverage. The main reason to understand ART, and the difference between current and guaranteed charges, is because it’s essentially the mortality component of many of the cash value policy types we’ll discuss.

Level premium term takes a different approach. Premiums are indeed level for a stated number of years, such as 10, 15, 20 or 30. With this product, there’s no distinction between the current and guaranteed premiums. The stated premium is in fact the guaranteed premium that the insured will pay for the stated duration. At the end of the guarantee period, the insured may have some options for continuing the coverage. The insured might be able to “re-enter” or medically re-qualify for another period of equal duration at guaranteed rates or just continue the coverage at the carrier’s prevailing ART rates. In either scenario, the coverage isn’t lost, but will be much more expensive because it will essentially mirror the carrier’s ART rates at the attained age.

Either type of term policy can be convertible, which means that the insured can exchange the term policy for a cash value policy without evidence of insurability, so long as the exchange is done within the conversion period, which may be stated as prior to a certain age or as a certain number of policy years. In some policies, the conversion period may be a lot shorter than one would expect from the length of the guarantee period. The prospective purchaser should be comfortable that the conversion period is long enough to be meaningful, that is, it won’t expire well before the individual would likely be interested in converting. Also, he’ll want to find out whether the policy is convertible into all of the carrier’s cash value products that it offers at time of conversion, just some products or even just one product.

NEXT: Cash Value Policies

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