When it comes to the many different types of life insurance, term life insurance may be more understood because of its simplified structure. Just like any other life insurance policy, it is designed to pay a death benefit to your beneficiaries when you die. With a term policy, you select the length of the term (typically from five to 30 years) and the amount of the death benefit that you need. If you die within the term specified in your policy*, the benefit will be paid to the person or people you have named as your beneficiaries. Also, it is sometimes possible to include two important types of policy choices - renewable and convertible.
Renewable term life insurance
Once your term life insurance policy has expired and you are still living, your policy will typically come to an end. However, if you have a renewable term life insurance policy, you (the policyholder) have the option of renewing your policy for an additional number of years. Just how long you can extend your term life insurance policy depends on your individual contract. While this type of policy may give you the option of renewal without having to undergo a medical exam, your new rate will be based on your current age and health.
For example, if you bought a 10-year, $25,000 renewable term life policy when you were age 30 and are now age 40, at the end of your policy's term you may have the option of renewing your policy for another 10 years, however, your new premiums will be based on your current age of 40. Moreover, if your health has changed or if you have since become a smoker, your rates will also reflect these changes in your health, resulting in higher premiums.
The benefits of selecting a renewable term life insurance policy could include being able to get the coverage you need now at an affordable price, and having the option of extending your coverage in the future for one or more terms. Just keep in mind that as you become older and if your health changes, you could be looking at paying much higher premiums. Most renewal provisions place a limit on the number of times that you may renew and the age at which you may renew.
Convertible term life insurance
This type of policy can allow you, the policyholder, the option of converting your term policy into a permanent policy in the future without undergoing a medical exam or having to answer any health questions. However, it's important to note that some insurance companies may put an age limit on when you can convert your policy. Keep in mind that your new premium at the time of conversion will typically be based on your current age and will reflect the higher expense associated with cash value life insurance.
For example, if you purchased a $25,000 term life policy at age 30 and convert it into a $25,000 whole life policy ten years later, your new premium will be that of a cash value policy for a 40 year old individual.
The benefit of selecting a convertible term life policy is having the option of locking into a permanent policy at a later date. This can be an important factor if you think your health may change over the years, affecting your chances of being able to buy more life insurance coverage. It's important to note that, depending on the policy, conversions may not be allowed after a certain period of time or after a specified age has been attained.
*As long as required premium payments are timely made.
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