Differences Between Types Of Term Insurance
Term insurance can be divided basically into annual renewable term life insurance and level term life insurance. The similarities between these policies are they are both for a specified term and they are among the least expensive and they offer only death benefit. The other type of insurance is the permanent insurance which is a cash linked investment plan. Permanent insurance is much more expensive than term plans since term plan expire and the pay out is meager and is one percent. The cash accumulation in the permanent plan makes it more expensive than term plans. That’s the reason why the term plans and permanent plans have such a vast difference in premiums payable.
Definition Of Types Of Term Insurance
Now let us look in to what is annual renewable term life insurance and level term life insurance before moving to compare them, Annual renewable term life insurance is a life cover that is offered to an individual for a period of one year at a rate which is guaranteed. As the one year period expires the policy is renewed but the premiums are higher since the age of the insured has increased. In majority of the cases, annual renewable term policies offer the lowest premiums available in the first few years of the policy. But as the age of the individual increases the annual renewable term life insurance policies start becoming expensive. Usually proof of health is not required to take up the policy. ART can be maintained up to the age of 95 but they start becoming too costly to maintain when the insured reaches the age 75. They are suited for occasions when cover is needed for only 2-3 years or a lesser period of insurance.
Most annual renewable term life insurance policies offer an option to convert the annual renewable term life insurance to permanent life policies. After the maturity of the term this option can be exercised. This does not require proof of fitness and health. This option is very useful in conditions of changing health of the policy holder. Conversion option will be available only at specific period up to specific age of the policy holder. And the premium for the permanent policy depends on your age at the time when the conversion option is exercised. Here cash accumulation is also there. So the policyholder can feel protected. Annual renewable term life insurance is designed for people with short term needs such as to pay off a loan or a person with fatal illness. So the initial premiums are low it is also suited for people within a budget and who have a lot of dependants. On each renewal premium increases so in the long term it is very expensive.
Level term insurance is one of the popular forms of life insurance. It provides death protection for a sum guaranteed over the fixed time period for fixed premiums. This policy takes into account the time value of money. The time periods of the policies are 5-30 years. The premium is based on the health, sex, age and lifestyle and term of coverage of the insured. For example smokers are charged a higher premium than non-smokers by most insurance companies. For two people of same age the cost of 20 years policy can be double that of the cost of 10 year policy for the same sum assured.
Renewability Options Of Level Term Life Insurance
There is a renewability option at the end of the maturity period. If it is taken up then premiums are higher and the rise is significant. In case of proof of health by medical practitioner is submitted by the policy holder lower rates may be applied. But in most cases the premiums increase just like annual renewable term life insurance policies. Like the annual renewable term insurance, almost all of the level term life insurance policies are guaranteed to be renewable up to age 95 of the holder and does not require medical proof.
Conversion Options For Level Term Life Insurance
Just like in annual renewable term life insurance conversion options are available on level term insurance policies too. So where there is deterioration in the health of the policy holder extended coverage is welcome and is provided with the conversion option. This protects the individual’s insurability with extended cover on a permanent manner. The conversion option can be exercised at the end of the maturity period or a specific age. This depends on the industry standards at the given time.
Level Term Life Insurance Works Best When
Level term life insurance is most suitable in circumstances where the insurance need is distinct over a definite time period. Typical uses for level term insurance include income replacement, key man insurance, reduction of debt, buy-sell agreements and paying off business loans. Level term life insurance is a provisional bridge that provides the low cost protection in the need of the hour but can be released when the cover is not necessary any more.
Differences Between Types Of Term Insurance
The first difference between annual renewable term life insurance and level term life insurance is the remarkable difference in premium costs. The annual renewable term life insurance policy is guaranteed renewable till the age of 70 while in the case of the Level Term policies guarantee period is only for the 10-year period. In case your health declined, you could still continue to renew the annual renewable term life insurance policy till the age 70. But with the level term life insurance policies, if your health worsened you should find a new insurance policy or you should convert the level term policy to a permanent policy which is much more expensive by the end of the period or the 10-year term. Care should be taken about which policy suits your family needs. For example if you have a highly dependant family and you are the major bread winner of the family then you should go in for level term policies. In case your family has a history of serious illness and disease you should go in for annual renewable term life insurance. If you have debts then you should go in for annual renewable term life insurance. If you can afford to spend on investment then you can go in for permanent policies.
In level term life insurance policies the premiums remain same throughout the policy but in case of annual renewable term life insurance the premiums increase every year when the premium is renewed. Maximum premium is specified at the beginning of the term. The initial cost is high in level premium policies than annual renewable term life insurance policies but it costs less over time. Renewal of policy is available both in case of annual renewable term life insurance as well as level term life insurance policies. Both the policies offer death benefit and the death benefit decreases as the age increases in level term policy. To maintain the death benefit amount the proof of good health must be provided by the policy holder. So a new policy can also be issued for the same rate. Both policies offer cash convertibility or permanent life insurance option at no extra cost or no proof of good health. This option is limited to certain periods and age. So before buying an insurance policy it is required to evaluate the terms of insurance and the needs of the family carefully.