Term life insurance offers comparatively affordable protection for policyholders. Like all life insurance, term life is designed to provide for loved ones in the event of an untimely death. However, part of the reason it’s not as expensive as whole life insurance is because there isn’t a cash value associated with. You’re paying strictly for the death benefit rather than any investment potential.
Term's Fixed Benefit
A term life insurance policy covers a specific period, such as 20 years. Premium costs are determined by the age and health of the policyholder at the time coverage is obtained, as well as the amount of the policy. For a 20-year, $2 million policy, if the person being covered dies while the policy is still in effect and the premiums are up to date, his heirs receive the $2 million. If he’s still alive after 20 years, the policy usually ends or the cost to renew it increases to the point where it’s no longer the best coverage option. In either case, no equity is given back to the policyholder.
Many insurance companies offer policyholders the chance to convert their term life policies to permanent, universal or whole life policies. All are different names for a policy that isn’t time bound and offers the chance for the policyholder to build cash equity. While you won’t have to take another medical exam, such a conversion means your premiums will rise both because of the ability to build cash value and your age at the time of the conversion.
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