When it comes to protecting your loved ones, most financial writers describe term life insurance coverage as an absolute slam-dunk, a no-brainer that fits almost any situation. It's as hard and fast as any financial product can be: You buy a set amount of coverage at a set price for a set length of time. In practice, not all term policies are equal. Some reduce their premiums by eliminating a variety of guarantees that are included in other policies.
When you buy a term life policy that provides coverage for just a few years, the premiums are usually both level and guaranteed for the duration of the policy. On longer-term policies lasting 20 or 30 years, premiums can be level for the entire period or can increase on a predetermined schedule. Either way, most policies guarantee the premium you'll pay for that coverage. However, some policies only provide guaranteed premiums for a specified period. After that, the company can increase premiums at its discretion, usually on the policy's anniversary date.
Term life policies are often purchased for relatively short terms, ranging from one year to the more common five. At the end of that time, if you still need coverage, you can renew the policy for another term. Most term life policies guarantee this privilege, meaning the insurer can't refuse to continue your coverage as long as you keep paying premiums. This can be a crucial benefit if your health and insurability should change. With a non-guaranteed policy, the insurer could refuse to renew your coverage or insist on a full medical examination.
Convertibility is closely related to renewability, and the two are often combined in the same policy. It means that you have the right to convert your term life policy into a permanent or whole life policy without demonstrating insurability. You can keep the same death benefit or lower it as needed to bring the premiums in line with your budget. Permanent policies are cheaper when you're older, just as term policies are cheaper when you're younger. If you foresee a long-term need for life insurance, conversion can make sense. If this feature isn't guaranteed in your policy, you'll need to prove your insurability.
Many whole life policies have a guaranteed minimum death benefit, and the policy's investment component provides additional cash values on top of that guarantee. Term life policies are simpler and usually guarantee a fixed death benefit. However, some companies offer non-guaranteed policies with variable death benefits. This approach is relatively rare and you're unlikely to be offered that kind of policy without explanation, but it's better to be safe than sorry. Ask your broker, or -- better yet -- scrutinize the quote carefully before you sign on the dotted line.
Term policies with non-guaranteed features are designed to keep the insurer's costs down and make it possible to pass along the lowest possible premium. If you absolutely, positively need the coverage and have the tightest of budgets, any life insurance is better than none. Bear in mind, though, that the highest cost of all is being refused coverage when you need it. Online services have made it possible for consumers to compare hundreds or even thousands of policies with a few mouse clicks, and you should be able to find a policy with guaranteed features to fit almost any budget.
Fred Decker is a trained chef and certified food-safety trainer. Decker wrote for the Saint John, New Brunswick Telegraph-Journal, and has been published in Canada's Hospitality and Foodservice magazine. He's held positions selling computers, insurance and mutual funds, and was educated at Memorial University of Newfoundland and the Northern Alberta Institute of Technology.