This form of Life Insurance provides coverage for a specified period of time, referred to as the term. Term Insurance has often been called temporary Insurance because there is no cash value accumulation, only the death benefit protection. This Life Insurance works fairly simply. Premiums are paid to a company either monthly, quarterly, semi-annually or annually. Next the company deducts expenses, premium taxes, and then the pure cost of the Insurance. If you die, your beneficiary receives the full death benefit income tax-free. If you live beyond the term of the policy, the coverage ends and you can renew for a different time period and at a higher premium.
CAUTION: Never name your estate as the beneficiary. This creates a whole slew of problems within a Buy-Sell. Specifically the proceeds become part of the probate process and also subject to the claims of creditors.
The terms (length) of the policy have changed dramatically over the years. When I first started some twenty-nine years ago, you could only really purchase a one year renewable term policy. Each year the cost would increase and you can imagine how upset the insured became. As a result, the Life Insurance companies began to offer term coverage for 10, 15, 20 and even 30 year periods. These premiums are level and guaranteed for the specified time period. Guaranteed, however, based on the claims paying ability of the company. We will devote a whole article to that later on. Suffice it to say, check the company’s ratings.
Term Insurance starts off very inexpensive. However, the cost increases as one grows older. Here’s an example. A young married couple purchase Term Insurance for a ten year period as this is the most affordable for them. After ten years the coverage ends, they then purchase another policy at a higher premium and with new medical (underwriting) requirements. This example works the same within Buy-Sell plans.
As part of my on-going effort to educate, let me offer a new form of Term Life Insurance, not widely known. It is called Return of Premium Term Insurance (ROP). Yes it’s true, if you survive the length of the term of coverage, the policy owner or premium payer receives all the premiums paid into the plan. Please keep in mind that the premiums on these types of policies run higher. Nevertheless it’s worth consideration as they can also be used within a Buy-Sell Agreement.