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Term life insurance policies last a fixed period of time. This type of insurance usually costs cheaper as it covers the person for only an agreed amount of time. If the person dies during the time period covered by the contract, his dependents will get a death benefit that is stipulated in the contract. However, if the person survives the period covered, the contract will be terminated and no money will be refunded.
Usually term life insurance is chosen to provide some precautions for the family in case of the death of a person. A good example is when the mortgage is taken out. The death of the breadwinner could cause some serious financial problems for the family and it is likely that the members of the family will not be able to repay the mortgage by themselves. Thus, an individual can choose term insurance to protect his family and relatives in case of his death until the mortgage is terminated. Most insurance providers limit the duration of term insurance contract. This limit can be set at the time when children reach adulthood, finish the college or when the mortgage is expected to be repaid.
Term life insurance is based on a decreasing responsibility theory. Most people purchase life insurance when they face some responsibilities: mortgage or children. However, after a certain time period these responsibilities start decreasing: the biggest part of the mortgage is almost paid out, the education fund for children is collected and retirement plans are fully funded. As a result, after 20 or more years it is likely that a person will not need life insurance.
The main advantage of term life insurance is its simplicity and low cost. Term life insurance does not offer investment options or other complex features like whole life insurance policies. Term life insurance is designed to provide an inexpensive option for people that want to provide a safety net for their family and relatives at a reasonable price. From the point of life insurance carrier, term life insurance is less risky than whole life insurance. It is estimated that insurance companies have to pay death benefits only for no more than 3 % of the contracts that they sold. On the other hand, if the insurance company issues whole life insurance contract and the person pays all premiums on time, the insurance provider will have to make a pay out to the dependents sooner or later. As a result, term life insurance is less risky and less costly. What is more, since term life insurance does not offer a saving component, the insured has to pay money only for the insurance component. This also results in lower premiums.
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There are two main disadvantages of term life insurance. First of all, term life insurance becomes more expensive as the person ages. It is because the older the people become the bigger is the possibility that they are going to die. As a result, people are advised to buy term life insurance in the early age and avoid paying high premiums. Another disadvantage is that when the policy expires the person may not be in good health and as a result can face difficulties when qualifying for another life insurance policy.
Although term life insurance policies are very simple, they still offer a wide range of variations. This way the individual can customize his life insurance policy. There are three main types of term life insurance: level term, increasing term and decreasing term. Level term life insurance contract offers a constant amount of cover, decreasing term life insurance cover decreases as the years go by and increasing term life insurance cover increases with time. What is more, the policy can be written on a single or joint basis. In addition to that, various benefits such as terminal illness or income protection can be attached to the policy at an extra cost. These variations allow a person to choose whether he want a bare life insurance policy or the one that has additional benefits attached.
Term life insurance policies can be renewable and non-renewable. If a person is allowed to renew the policy when the old contract expires by paying higher premiums, than the policy is renewable. On the contrary, non-renewable policy simply expires at the end of the term without possibility to continue it. The policies that offer a continuing cover cost more.
Term life insurance policies can also be convertible and non-convertible. Convertibility option allows the insured person to change his term life insurance to whole life insurance at any time or at the end of the term. Most life insurance carriers require their clients pay more money for this option, however this benefit can be very beneficial for older people.
One more variation is called family policy. This benefit allows all members of the family to be included in one policy. Most life insurance companies cover the primary policyholder with whole life insurance and the remaining member are covered with term life insurance policies. If the primary policyholder dies, the rest of the family stays insured and do not have to pay the premiums. Not all insurance providers offer this option and those that offer charge extra money for that.