Types of Term Life Insurance

Term life insurance comes in many different flavors. We feel that the more traditional Level term life is the best approach but it's important to know what else is available and understand why level makes sense in comparison. Let's take a look at the different types of term life on the market.

The most common type of term life is level term life. It's pretty straight forward and this simplicity is it's real value. This is also referred to as guaranteed renewal term. Essentially, you pay a fixed and guaranteed premium for a fixed period of time with a fixed benefit. For example, you may pay $40 monthly for 20 years for $500K of life insurance benefit in the event of your passing during that 20 year window. That's it. Clean and simple. The term periods usually range from 5 years to 30 years in 5 year increments. This is the most common type of term life available on the market and when you run your term life insurance quote, the rates and options reflected are generally of level term. Let's look at the other types of options which usually affect either the benefit amount or the term period.

Decreasing term life insurance takes this basic structure of level term and reduces the term life benefit amount as the policy continues forward in time. For example, the term benefit may be $500K during the first 5 years, then $250K during the next 5 years, and $100K during the last 5 years of a 15 year policy. This decreasing term would be less expensive than the $500K above since the benefit is decreasing but the added complexity doesn't make sense. First, you're assuming that in years 11-15, you don't need as much protection as the first 10 years. That's a big assumption and anyone will tell you that financial responsibilities are known to decrease with time. For example, if you have young children, college might be approaching towards the end of the term period. You're making a bet that something would happen earlier than later and we personally feel that gambling and life insurance are bad partners. For the same amount, look at purchasing level term life for a less amount...say $300K.

What about the flip-side, Increasing term life insurance? This is just a different bet...let's say red instead of black. The amount of benefit increases as the term period progresses. For example, it might be $100K the first 5 years, $250K the next 5 years, and $500 the final 5 years of a 15 year period. The problem is that life insurance at its core is a replacement of income over a long period of time. If you pass away during the first 5 years, you have $100K of protection to carry the family for more than 10 years! That's a bad gamble as well. The whole point of life insurance is offset risk not bet on which risk might occur and which one might not.

There are some other variations of term life available on the market. Yearly renewable term life is an example. With this type of policy, the subscriber can renew annually for one year blocks of term life on a guaranteed issue basis. This is really just an attempt to dress term life in whole life clothing. Very similar to the wolf in sheep's clothing, there's a downside in the form of a much higher premium. This goes back to the whole theory of why term life insurance makes more sense than whole life as we have addressed in our whole versus term life or term life and investing articles. You will pay quite a bit more for this ability to renew annually and that money might be better put to other uses.

Term to age 65 or a fixed age (for example 70) is another hybrid between term and whole life. Essentially, it's just a core term life benefit but there's usually a cash value element. As discussed in the whole life versus term article, this cash value benefit can be only be won with extra premium that you pay. You're paying a dollar to get change back. Not the best of deals unless you're the life insurance company or selling agent.

Finally, another vehicle available is Re-entry term. With this type of life insurance policy, the life insurance rates are lower but you have to re-qualify based on health at periodic breaks such as every 5 or 10 years. This is just another gamble..gambling that you will be in good health when the re-qualification period comes up. For true peace of mind, level term life insurance still provides the best value and protection in our opinion. If whole life is over-insuring the risk, these hybrids of term life go the other way with potential risks built in by design.