Living In The Moment: A Term Life Insurance
Do you know what the Theory of Decreasing Responsibility is?
It is an insurance sales philosophy that was promoted by Primerica, a multi level marketing company who engages in various financial services.
The theory states that the financial responsibilities of an individual are temporary, and that an insurance policy should be bought to offset said responsibilities.
The Primerica company propagandized this philosophy primarily to attract people to sign up for their insurance policies. It was especially useful for marketing their term life insurance policies.
A term life insurance policy is basically just a variant of a regular life insurance policy. The idea behind it is that a term life will grant an insured with more flexibility in investing their money, and it should be used with the Theory of Decreasing Responsibility in mind. Think of it as a “retail” version of a life insurance policy, you can opt to purchase either an annual or a level term life if you cannot shoulder the burden of a regular life insurance’s premium.
A term life insurance for one year is considered the simplest form of term life. Here, the death benefit would only be covered by the insurance company if the insured dies within the span of one year and not a day after that. Not a lot of people buy this kind of term life, as it is not really cost effective. The probability of the insured dying within the year is relatively low, and so the premium paid is just the expected probability of death within the year plus the cost and profit share of the insurance company.
An alternative for this is the annual renewable term life. It is a variant which guarantees the insured a renewal of his policy every year for a given number of years. The premium will be higher of course, but there is also a higher likelihood that the insured will get his benefit.
A level term life insurance is much more common than an annual renewable term life simply because it covers a greater amount of time. An insured can opt for any number of years, but most common periods are 10, 15, 20 or 30 years. The premium paid is the same every year, there is a time value of money adjustment and the cost of every year’s annual renewable term fees are averaged over the term. Inevitably, the cost of the premium will also increase as the term lengthens, but this will also increase the chances of getting the death benefit.
Some studies show that the death benefit payout for term life insurance policies are very unlikely. But this is the reason why term life is able to offer relatively lower costs than regular life insurances.
However, some term life insurance policies also offer “conversion privileges”, due also to the preference of the majority for permanent life insurance. A conversion privilege allows the insured to convert to a permanent life insurance plan after a number of years on a term life, regardless of their health condition at the time of their conversion. This is a good way for someone to initially purchase a term life insurance policy for a lower cost, and then avail of the tax advantages of a permanent life insurance in the long run.
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