Types of Term Life Insurance: A Complete Guide (2024)

Guaranteed Level Term Life Insurance

Guaranteed level term life is the most common type of term life insurance. It is defined by yearly premiums that never increase during the life of the policy. The fact that the policy has a defined expiration is a clear drawback to this type of policy. Even though most policies have renewal clauses, these do not guarantee the ability to renew the policy. Whether or not renewal is available is dependent upon the wording of the policy.Level term life insurancepolicies, for the most part, last for 10, 20 or 30 years. The premiums will be higher each year for longer term policies.

Annual Renewable Term Life Insurance

An ART, or Annual Renewable Term policy is a short term life insurance policy that can be renewed every year for a defined length of time. When the policy is renewed, the premiums go up, increasing more and more dramatically after a period of 20 to 30 years. These increases will be explained in more detail shortly.

Return of Premium Term Life Insurance

This type of term life insurance has a special stipulation that guarantees to refund the life insurance premiums when the term period ends, assuming that the person insured is still living. These policies are typically available in 15, 20 or 30 year terms. While being pricier than a typical term life insurance policy, it is much less expensive than a whole life insurance policy and has similar advantages.

Decreasing Term Life Insurance

Decreasing term insurance is designed to pay a lower claim as the policy ages. Basically, the death benefit decreases throughout the period of the plan. While this type of coverage may at first sound odd, it is meant to insure people who currently have greater financial responsibilities that will decrease over time such as a mortgage or other large debts.

Modified Term Life Insurance

A modified term life insurance policy refers to a policy that utilizes an alternative payment structure to a standard life insurance plan but offers the same protection. These policies may have premiums that increase over time or be structured like a decreasing term life insurance plan where the payments decrease over time. These policies may help you afford the coverage you need but require planning and careful consideration of your own personal situation.

About those increasing rates, and disappearing benefits:

It happens that a term policy cannot be renewed or extended, the policy will expire if the policyholder lives longer than the terms of the policy and there will be no benefits paid. Non-renewable policies can provide a way to ensure that your children will get a college education or that your home will be paid off in full if you die before the mortgage is completely paid off.

It has been reported that the odds of any person dying in the next year is approximately 1%. This means that annual renewable term life insurance policies are nearly guaranteed to not pay off. Interestingly, for every year of the policy, the likelihood rises by 1%. Policies that extend beyond 20 years begin to assume higher risks and may have a payout as high as 50%. The longer the policy term, or the older a person is when they begin on the policy, the more risk the insurance company takes on, and the higher the premiums become when they change.

Case Studies: Exploring Different Types of Term Life Insurance

Case Study 1: John’s Mortgage Protection:

John is a homeowner who recently purchased his dream house. To ensure his family’s financial stability in case of an unfortunate event, he opted for a mortgage protection term life insurance policy. This type of term life insurance provides coverage for a specific period, aligning with the duration of the mortgage loan. If John passes away before the mortgage is paid off, the policy will pay the remaining balance, allowing his family to continue living in the house without financial burden.

Case Study 2: Sarah’s Education Fund:

Sarah is a devoted mother who wants to secure her children’s future education. She decides to invest in a term life insurance policy that is specifically designed to fund her children’s education expenses. With this policy, if Sarah passes away during the coverage period, a lump sum payment will be provided to ensure her children can pursue their educational aspirations without any financial constraints.

Case Study 3: David’s Business Continuation:

David is a business owner who wants to safeguard the future of his company and ensure a smooth transition in case of his untimely demise. He chooses a term life insurance policy known as a “key person insurance.” This type of coverage provides funds to help the business survive and maintain its operations, covering expenses such as hiring and training a replacement for the key person in the organization.

Case Study 4: Emily’s Income Replacement:

Emily is the primary breadwinner of her family. To protect her loved ones’ financial well-being, she opts for an income replacement term life insurance policy. If Emily passes away during the term, her family will receive a regular income stream, replacing her lost earnings and allowing them to maintain their standard of living.

Case Study 5: Mark’s Estate Planning:

Mark is concerned about the estate taxes that his beneficiaries might have to pay upon his death. To mitigate this financial burden, he selects a term life insurance policy that aligns with his estate planning goals. This type of policy, often referred to as “estate preservation insurance,” provides a tax-free payout to cover estate taxes, ensuring that Mark’s loved ones receive the maximum value from his estate.