Term Life Insurance Explained

• Term life insurance is examined

What is Life Insurance?

• Life insurance involves a contract between an insurance company and a policy owner, where the insurer guarantees payment to beneficiaries upon the insured's death
• Life insurance aims to aid loved ones financially after the policyholder's death
• A one-time, tax-free death benefit is provided to a family, estate, or trust

How Term Life Insurance Works

• Premiums for term life insurance policies are determined by the insurance company, based on factors like payout amount, age, gender, and health with medical exams sometimes required
• Term life insurance is often available in 10, 20, and 30-year terms
• Beneficiaries receive the face value if the policyholder dies during the policy term
• The face value is non-taxable cash that can be used for debts, healthcare, and funeral costs but there are no restrictions on how it can be used

Level Term Life Insurance

• Level term life insurance is the most common type of term life insurance
• Death benefits and premiums remain consistent throughout the policy term
• The insurance is ideal for those seeking predictable costs and stable coverage
• Level term life insurance is often used for family protection, income replacement, and financial planning

Decreasing Term Life Insurance

• Over time, the death benefit decreases, while premiums remain the same
• Decreasing term life insurance often covers financial obligations like mortgages
• This insurance is best suited for matching coverage with declining debts
• Decreasing term life insurance is typically more affordable than level term life insurance

Increasing Term Life Insurance

• Death benefits increase over time, often at a set percentage
• Increasing term life insurance helps keep up with inflation and growing financial responsibilities
• To reflect increasing coverage, premiums may rise
• Increasing term life insurance is appropriate for those expecting rising financial needs

Renewable Term Life Insurance

• Renewable term life insurance allows policyholders to renew coverage at the term's end without a medical exam
• Premiums increase upon each renewal, based on the policyholder's age
• This insurance is most appropriate for short-term coverage with the option to extend
• The insurance is useful for those uncertain about long-term insurance needs

Convertible Term Life Insurance

• Convertible term life insurance can be converted into a permanent life insurance policy without a medical exam
• This insurance provides flexibility to those who may want lifelong coverage later
• Convertible insurance is useful when financing changes, such as estate planning or family security
• Convertible term life insurance is more expensive than traditional term life insurance

Return of Premium (ROP) Term Life Insurance

• ROP term life insurance refunds premiums if the policyholder outlives the term
• This insurance is more expensive than standard term policies, but offers a money-back opportunity
• ROP term life insurance is ideal for those wanting a return on their investment if they don't die during the term
• A death benefit remains in effect during the policy term

Group Term Life Insurance

• Provided by employers or organizations as employee benefits
• Group term life insurance is typically renewable yearly and may not require a medical exam
• Often, coverage is limited and may not be sufficient for individual needs
• Group Term provides a cost-effective option for employees seeking insurance coverage

Who Needs Insurance?

• Single young people may not need life insurance if they have no dependents and are at low risk of early death, unless their parents would benefit
• Young families with spouses and children that depend on their income will need life insurance

Determining Insurance Needs

• Insurance needs depend on financial responsibilities, goals, and lifestyle
• The Income Replacement Method substitutes annual income with insurance for calculations
• The Income Replacement method offer a straightforward way to calculate insurance needs

Scenario: How Much Insurance Does John Need?

• John is a 35-year-old software engineer with an annual income of $80,000
• John is married with two children, ages 5 and 7
• John's goal is to financially support his family for the next 20 years if something happens
• John needs $1,600,000 based on income replacement ($80,000 annually x 20 years)
• Child education costs will total $100,000
• $80,000 is needed to repay the mortgage balance
• Other debts and funeral costs need $20,000
• John needs to acquire $1,800,000 in term life insurance to provide for his family

Underwriting and Risk Factors

• Underwriting involves the risks associated with insuring an individual
• Risk factors include drinking, smoking, and drugs
• Underwriting decisions are influenced by drinking, smoking, and drug use

Smoking, Alcohol and Drugs

• Smoking and drug use present big risk factors in life insurance underwriting
• Moderate smokers and drug users increase their chances of suffering heart disease, cancer and other illnesses
• Smoking and drug use will cause the insured to pay a higher premium
• A 30-year-old nonsmoker may pay $30/month for a 20 year, $500,000 term life insurance
• The same person may pay $90/month if they are a smoker covering the same coverage
• Insurance companies will ask on the insurance applications if the applicants smoke or use drugs

Provisions Within Insurance

• Provisions refer to situations that may allow the insurer to avoid paying out a claim.
• Types of provisions: Suicide, high-risk activities and failure to disclose

Market Trends and Innovations

• Simplified issues policies require minimal medical information or no medical exam
• Digital distribution is increasingly used to compare policies
• Healthy lifestyles may benefit from lower premiums

Role of Term Insurance in Business Protection

• Term insurance plays a role in buy-sell Agreements, key person insurance, and loans

How Insurance Companies Profit

• Insurance companies profit from risk assessment in applicants, lapse rates, and investment of premiums

Avoiding Term Life Insurance

• Optimism bias, talking about death, misconception, and procrastination prevent people from acquiring term life insurance