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Types of Term Life Insurance

So you have come to the point where you are interested in purchasing Texas life insurance, and most people are telling you to buy term.  First you need to understand the meaning of term life insurance, and then determine if it is right for you and what type of term insurance you should buy?

Term insurance is temporary life insurance policy which has an established and defined coverage duration stated in a specific number of years.  The most common types of term insurance are written for either 10-, 20-, or 30-year terms.  Other types of term insurance which are very popular are increasing and decreasing term.  All of these policies will be discussed below.

Term insurance is popular because it is the least expensive way to get the highest face amount on a policy at the lowest premium available.  In fact, permanent insurance is often 3 to 6 times more expensive than term.  The trade-off is that term insurance coverage will expire, which means the benefits will cease.  For example, if you are 40 years old with a ten-year term policy and you pass away at 51 your beneficiaries would not receive any death benefit.  Also, unlike a permanent policy, term insurance will pay no dividends and will build no cash value.  The permanent policy on the other hand will generate a cash balance that can be used to borrow against.  Lastly, you should be aware of the risk involved in replacing a term insurance policy with a new Texas life insurance policy when the original term policy expires.  You may want to take out a new term policy, but you discover that medical conditions which have occurred since the original policy was purchased prevent you from being approved for a new policy or result in a significant rate-up.  If you had cancer during the initial original coverage period of a terminated 20-year term policy, you may find no carrier willing to issue a new term life policy, or the rate-up results in coverage that is not affordable it.

Types of term policies:

10-, 20- AND 30-YEAR TERM POLICIES: policies get their name from the length of time the coverage is in force.  Common characteristics shared by these policies are that the premiums are level, meaning cost of coverage the policy holder pays never increases for the life of the policy, and that the death benefit or face amount of the policy does not change.  As a rule of thumb, the longer the term length the more expensive the premium will be.

So why would someone purchase a 10-, 20-, or 30-year term policy.  The 10-year term policy is the least expensive and is often needed to secure loans such as a home mortgage.  The 10-year term policy can also provide for a larger face amount of insurance at a more affordable premium than a policy with either a 20- or 30-year term.  As an example, a $500,000 10-year term policy for a healthy 42-year-old male would cost $23.25 per month, compared to the same face value for a 30-year term at a cost of $64.66 per month.

A 20-year term policy is the most purchased, as it combines affordability with longer term coverage.  This policy can provide life insurance coverage for a family through many important stages, including securing a home mortgage, providing for a child’s post-secondary education, or protecting business debt.

A 30-year term policy is not purchased as much as the others as the costs are much closer to the cost of a permanent policy.  Typically, the premium on 30 years is high enough to justify spending a little more and having the security and savings aspects of a permanent policy.  One situation that makes sense for a 30-year term policy is an individual who is 45 to 55 years old and wants a long-term solution to insurance needs and wants to remove the risk of needing to secure a new term policy after 10 years with the potential of health issues affecting either cost or availability of the replacement coverage.

INCREASING OR DECREASING TERM POLICIES: policies get their name from the cost associated with the premium paid.  Decreasing term charges less for the policy as time goes by because the face amount of the policy decreases over time.  Decreasing term is very popular in conjunction with mortgages where the policy holder owes the most at the beginning of the mortgage but will need less coverage over time as the amount owed is reduced.

Increasing term unlike decreasing term has a level face amount over the period of the policy.  However, the premium increases over time at a rate to provide for the level benefit.  This is a great type of Texas life insurance policy for an individual such as a recent college graduate or a business owner in the start-up phase of a company, who has a low income but thinks the income, will significantly increase over time.

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