Term Insurance

Read the text below and do the tasks that follow.

Term insurance is a traditional type of life insurance that provides basic life insurance protection. It provides solely death protection for a fixed period of time such as one, five, or ten years. The face amount of the policy is paid only if the insured dies within the time or term stated in the policy. Term insurance is pure insurance, based on actual data on the probability of death occurring within the fixed period of the policy. As the insured gets older, the probability of his or her death during the current time period obviously increases; thus the cost of term insurance increases with the age of the person involved. At about age 65, the cost of pure term insurance becomes prohibitive. However, for a 35-year-old breadwinner with a nonworking spouse and two or three young children to support – perhaps the prototypical individual needing life insurance – term insurance provides a very large degree of temporary protection at a relatively modest cost.

Term insurance policies usually require a medical examination, though some companies may write term policies for younger persons solely on the basis of written health-related questions. Persons in certain risky occupations or having risky avocations may not be able to obtain term insurance at all, or may be able to obtain it only by paying an additional premium. Term insurance policies are usually renewable for additional terms (at higher premiums) without another medical examination or questionnaire. Many policies provide for level premiums for periods up to five years, with the level premium during this period being approximately equal to the average of annual premiums over this period for a person of the age in question. Term insurance is also often sold at bargain prices in connection with or as a sweetener for other types of life insurance.

Group life insurance is a type of term insurance usually provided by employers for their employees, and also is offered by a wide variety of different kind of membership organizations – fraternal organizations, trade associations, social clubs, investment clubs, and so forth – to their members through the organization. The premium for the group life insurance is usually lower than the premium for the equivalent amount of term insurance that could be purchased individually for the same persons.

Term insurance may be either face amount insurance (in which event the face amount is constant and the premium increases periodically) or declining balance (in which event the premium remains constant but the face amount of insurance coverage declines as the person grows older). A very common kind of declining balance insurance is mortgage insurance, sold in connection with a mortgage on a home, or credit insurance, required by many lenders when they make small consumer loans.

Declining balance term insurance is also sold through magazine or newspaper advertisements that promise small amounts of insurance and claim that premiums will not increase before a person reaches some specified age. These polices are usually extremely expensive for the coverage provided. A give-away that declining balance term is being advertised is usually that the amount of the insurance is either not set forth or is described as up to some specified amount.