Term Insurance and Terms You Need to Understand

By Shane Flait ©2008

Insurance companies charge you premiums based on your health and age. When you buy life insurance to cover you for only a set number of years, the insurance companies offer you different types of premium options to pay for your coverage. This article explains some key words that insurance companies use to characterize these premium types. Understanding them is critical to recognizing the possible cost and length of your coverage.

Life insurance companies expect you to live a certain number of years, statistically. The longer your coverage even if you maintain your health, the greater is your risk of dying. Also the longer you hold coverage, the greater is your chance of developing health problems that will also increase your risk of dying. Recognizing this, insurance companies contrive different premium types to protect their liability and, perhaps, lower your current premiums temporarily.

When you buy ‘term insurance’ you’re paying for ‘pure’ insurance. There’s no savings or cash value component associated with the policy. Its premiums (i.e. the payment you make to own the policy) covers only the risk of death and payment of the ‘death benefit’ during your coverage time.

Many insurance companies offer level premium term insurance. Premiums may remain level (i.e. constant) for a period of 5, 10, 15, 20, 25 or even 30 years. These policies are inexpensive and can provide relatively long term coverage.

Some level premium term policies contain a guarantee of level premiums; others don’t. Without a guarantee, the insurance company can surprise you by raising your premiums (the amount you must pay to keep the policy in force), even during the time you expected your premiums to remain level. Make sure you understand the terms of your policy.

When considering which type of policy to use, you’ll need to familiarize yourself with all the terms and conditions that the policies present. When you purchase insurance – life as well as health or disability - you’re obviously interested in maintaining it until you feel that you don’t need it anymore.

You should understand some key terms pertaining to insurance that have a direct bearing on maintaining your police and reaping its proceeds. Four terms of particular importance to them are:

·         conditionally renewable,

·         renewable,

·         guaranteed renewable and

·         non-cancellable.

A conditionally renewable policy means that you can renew your policy but subject to the insurer’s conditions. Here, the insurer can cancel your policy if you’ve made too many claims or, for some reason, appear to be a higher risk. Under such a condition an insurer can drop you when you need the coverage most. As an example, if you paid on a conditionally renewable health insurance policy for 20 years without filing many claims, your insurer can drop you when you turn 60 or 70 -- just when you’re likely to need more medical services.

A renewable policy allows the beneficiary to extend the coverage term for a set period of time without having to re-qualify for coverage. It’s contingent on premium payments being up to date. A life insurance contract having a renewable term clause would be beneficial since future health circumstances are unpredictable. Although the initial premiums are likely to be higher than those of a life insurance contract without a renewable term clause, buying this type of insurance is often in the beneficiary's best interest.

A guaranteed renewable policy prevents the insurer from unilaterally dropping you as long as you keep paying your premiums on time. Virtually all health insurance policies written today are guaranteed renewable. While re-insurability is guaranteed, premiums can rise based on the filing of a claim, injury, or other factor that could increase the risk of future claims. Premiums can also be raised on an entire class of insured people during the life of a guaranteed renewable policy for health, life or disability insurance.

Most insurers offer both guaranteed renewable policies and non-cancellable policies. If premiums are similar for both a guaranteed and a non-cancellable policy, the non-cancellable policy will offer the double guarantee of re-insurability and locked-in premiums.

Shane Flait is a writer and educator. Get more info at www.EasyRetirementKnowHow.com