Renewable and Convertible Features in Term Policies

Exclusive of the term covered, term policies are of two
main kinds: (1) those which grant insurance only for the
specified term and are renewable only upon a satisfactory
medical examination: and (2) the renewable-term policy, the
conditions of which give the holder the option, at the expira-
tion of the first-term period or at the end of any subsequent
term period, to renew the policy without a medical examina-
tion and irrespective of the insured's health at the time of
renewal. The renewal of the policy, in other words, can be
effected by the insured by paying the premium for the age
then attained. Usually, however, the companies limit the
age (generally 55 or 60 years) at which such renewal term
policies may be issued, and in some instances the number of re-
newals permitted is limited. Where the term policy contains
no renewal privilege the insured may be placed at the disad-
vantage at the end of the term, of being without insurance
and of not being in a position, because of poor physical con-
dition, to secure a renewal of the contract or to obtain any
other form of life-insurance protection. In many instances,
also, the particular contingency which the term policy was
designed to cover, may still exist at the expiration of the
term, thus making highly desirable the privilege of renewing
the contract for one or more terms at the will of the insured
and without the possibility of denial on the part of the com-
pany.

Nearly all term policies also contain the so-called con-
vertible feature, i.e. the privilege on the part of the insured
of converting the policy into another type of contract upon a
proper adjustment being made in the premium charge. Some
companies extend this conversion right throughout the term
period, but the great majority grant the right only for a lim-
ited number of years, such as the first four, five, or seven
years of the term. Conversion is usually allowed into whole-
life, limited-payment, or endowment insurance. The ex-
change is usually allowed on any anniversary of the policy
during the period when conversion is permitted, and may be
effected in one of two ways. The new policy may bear the
date of the surrender of the original policy and the premium
thereon be that required for such new policy at the attained
age of the insured. Or, the new policy may be considered as
bearing the date of the original policy, in which case the
insured is usually required to pay to the company the difference
between the premiums which would have been paid on the new
policy if it had been issued at the same time as the original
policy, and the premiums paid thereunder for the same
amount of insurance, with interest on euch difference at a
certain stipulated annual rate. 1

The advantages of the conversion privilege become apparent
if we consider the disadvantages usually attaching to term in-
surance. At the time of taking out the policy the insured
may not have definitely selected the type of policy best adapted
for his needs. Following the issuance of the term policy his
circumstances may soon become such as to enable him to
take out adequate permanent insurance. Or he may desire to
utilize insurance as a means of accumulating an estate rather
than to use it entirely for protection against death. As soon,
therefore, as he concludes that term insurance does not meet
his present and future needs he may carry out his conclusions
by exchanging his term contract for one on the whole-life or
endowment plan in either of the two ways already suggested.
Moreover, another great value of the conversion privilege also
becomes apparent (where the policy does not contain a re-
newable privilege) when it is remembered that a consid-
erable percentage of the insured lives become physically im-
paired to such an extent during even the first five or seven
years following the issuance of the contract, as to make im-
possible the securing of any other plan of life insurance in a
reliable company. Under such circumstances a non-renewable
term policy may, because of its expiration before death, fail

Related posts:
Disadvantages of Term Insurance

Disadvantages of Term Insurance

Disadvantages of Term Insurance. While the foregoing
illustrations serve to indicate the useful purposes that may
often be derived from term insurance, it is important to note
that this type of contract presents various dangers that are
frequently overlooked and that should always be borne in mind
by the person contemplating the taking out of such a policy.
Although the absolute cost of term contracts is very low in
the younger years the sole purpose of such policies is to furnish
temporary protection.

The entire premium represents payment for this protection and
nothing is paid to the insured in case of survival at the
expiration of the policy. It is a common assertion that the chief
objection to this form of insurance is that the insured is apt
to feel dissatisfied at the expiration of the contract, and that
it is most difficult to make the average holder of such a policy,
after he has paid ten or twenty premiums, appreciate the fact that
he has already received full value in the form of protection for the
premiums paid and is therefore not entitled to any refund.

While the insured may feel that he will be in a financial
position later to make the carrying of insurance unnecessary,
or to replace his term insurance with policies at a greater
cost but which afford permanent protection, there is nearly
always the danger that he may have miscalculated the future
or may neglect to carry out his original ideas. Hence, if the
ordinary term policy is not supplemented with other forms
of insurance, such as whole-life or very long term insurance,
there may come a day when the policyholder, upon the ex-
piration of the term contract, will be without insurance at
the very time when he may need it most. Assuming that he
will be able to obtain other insurance at the time by passing the
required medical examination, his advanced age will have
greatly increased the premium, and possibly at that time, his
early expectation of a larger income not having been realized,
such increased cost may prove exceedingly burdensome. More-
over, other types of policies generally commend themselves in
preference to term contracts in that they inculcate in the
policyholder to a much greater extent a compulsory spirit of
thrift and cause the great majority to have to their credit a
large sum, accumulated from small payments promptly in-
vested, which otherwise they would not have accumulated or
would have lost or wasted. Term insurance, as already stated,
represents cost for protection only, and the smallness of the
premium should prove an attraction only where large pro-
tection is absolutely needed and where the available fund for
premium payments makes a more permanent form of pro-
tection impossible.

Related posts:
Advantages of Term Insurance

Advantages of Term Insurance

Term policies are especially designed to afford protection against contingencies
which either require only the taking out of temporary insurance
or call for the largest amount of insurance protection for the time
being at the lowest possible cost. The advantages of this type of contract may be enumerated briefly as follows :

1. Term contracts are often desired by those who need a
large amount of family protection at a time when the income
is so small as to make impossible the payment of the premium
for an equal amount of protection under other types of
policies. This is especially the case where family responsibilities
have been assumed by young professional or business
men who are just starting their careers and who, appreciating
the necessity of adequately protecting their families against
the contingency of early death, feel that they need heavy
insurance protection at small cost pending permanent establishment
in their profession or business. Persons so situated
may feel inclined to subordinate the investment feature in
life insurance to its protective function. "Wanting all the
protection possible during early years, they may feel that they
can more advantageously use all available savings in their
profession or business. Or, looking forward to a larger income
later in life, they may reason that they can then advantageously
replace or supplement this type of contract with
policies of other kinds which have permanent protection as
their primary purpose.

The extent to which large protection is granted by term
policies for a small outlay at a time when such increased protection
is absolutely needed at small cost, may be exemplified
by the following rates charged by a certain company selected
for purposes of illustration. The annual premium charged
by this company for a $1,000 whole-life policy at age 25 (the
policy in this instance being paid whenever death may occur)
is $19, at age 35, $25.45, and at age 45, $36.50. But the
risk of death during a limited term of years is less than that
under a whole-life policy where the risk converges into certainty.
Because of this fact term policies for five, ten, fifteen,
or twenty years offer the advantage of a much lower annual
premium. Thus in the case of the company referred to a five-year
term policy for $1,000 at age 25 requires a gross premium
payment of $11.09, and the premiums charged for successive
renewals of this five-year contract are : at age 30, $11.65, at age
35, $12.50, and at age 60, $42.21. In the case of a ten-year
term policy at age 25 this company charges $11.34, while the
renewal premiums at ages 35, 45, 55, and 60 are, respectively,
$13.10, $18.27, $34.54, and $51.20. The same principle applies
to term policies for fifteen, twenty, or any other number
of years. If such policies are renewable at the option of the
insured without medical examination, the policyholder may
feel that by a number of renewals he may enjoy a large protection
for a considerable number of years at a low cost, and
discontinue such renewals when the protection is no longer
needed, or when the renewal rate becomes too burdensome. It
should be noted in this respect that, whereas the rate for a
ten-year term policy at age 25 is only $11.34, as contrasted
with $19 for the whole-life policy at the same age, the latter
rate remains the same throughout life, while the successive
renewal rates for the term policy increase with advancing age
until they become practically prohibitive, the rate charged
by this insurance company being $34.54 at age 55, and $51.20
at age 60.

2. Term insurance may also enable young men to acknowledge
their debt to parents or relatives of modest
means who have given them their education or who have
started them in business. Under such circumstances every
young man owes this debt to parents and should, as soon as
he is able to pay the premium, acknowledge it by carrying
insurance for their benefit so that their investment in him
will be protected against the contingency of an untimely
death. In the same way a term contract may enable one to
provide adequately during the early years of one's professional
or business career for a dependent mother, sister, or
other relative. Where the age of the parent is advanced the
term of the contract may be so arranged as to afford protection
during the probable lifetime of the beneficiary. But
where the beneficiary is comparatively young, the purpose of
the term contract may be regarded as furnishing a large protection
at small cost, the insured looking forward to a large
income in later years which will then enable him the more
readily to make the protection permanent by other types of
contracts. Again, the insured may desire additional protection
while his children are young and his own estate is small
so that in case of early death there will be an adequate fund
for educational and maintenance purposes until the children
become self-supporting.

3. Such contracts are also well adapted in many instances
to furnish protection against some temporary business hazard.
Many such contingencies may arise, but only a few need be
mentioned to illustrate the usefulness of term insurance in
this connection. A business firm may wish to protect itself
for a definite number of years against the loss through early
death of the highly valued services of an employee or of an
official who is regarded as essential to the continued success of
the business enterprise. Or the firm may have engaged the
services of an expert in an undertaking which it will require
a certain number of years to complete, and as the work progresses
may be obliged to make a considerable outlay of capital
which might be lost or seriously impaired by the death of
said expert before the completion of the work. Under such
circumstances the firm might find a term policy, especially
in view of its low cost, highly attractive as a means of protecting
itself against loss during the period required for the
completion of the work. The sum secured under the policy
in case of death would, indemnify the firm for any loss incurred
by way of impairment of the capital, or by delay in
completing the work, assuming that another expert might be
found to continue the project. In many business undertakings
it may be found desirable to protect the business during
the first five or ten years usually the crucial and experimental
stage when its promoters are confronted with the task,
frequently involving great risk, of establishing it on a firm
foundation as regards clientele and credit. These are a few
instances to illustrate how a firm or corporation may cover
any temporary extra hazard, when the low cost of insurance
is of chief importance.

In the same way an individual may, in many instances, use
term insurance advantageously to enhance his opportunities
or to make his financial position more secure. A young man
may, for example, complete his college course or may start in
business on borrowed capital which has been secured by protecting
the lender against the possible loss occasioned by early
death which would prevent repayment of the sum borrowed.
Sometimes a person may have definite assurance of a certain
sum of money in the future, such as an inheritance, pension,
or death benefit, but is obliged during the interval to borrow
money or to obtain insurance protection against death before
the stipulated time arrives. In such cases term insurance
may be used to great advantage. The lender will be doubly
protected, since the loan will be paid out of the inheritance in
case of survival and out of the insurance proceeds in case of
death. On the other hand, the need for insurance protection
may expire when the policyholder is assured protection under
the terms of the pension or insurance fund established by the
firm or institution with which he is connected, the term policy
in the interval of waiting having served its purpose as temporary
protection. Again, money may have been borrowed on
a mortgage on real estate, the mortgage running for a definite
number of years and the mortgagor expecting to pay off
the mortgage out of income during that period. While the
mortgagee may feel entirely competent to accomplish the payment
of the mortgage out of savings from his income, it is
highly important to remember, as already stated, that it takes
time to save, and that a resolution to save should be hedged
with an insurance policy so that if the saving period is cut
short by an untimely death the proceeds of the policy may
liquidate the balance of the indebtedness. A $5,000 mortgage,
which it is expected to pay in ten years, can, therefore,
be advantageously hedged with a $5,000 ten-year term policy.
In case of survival and the payment of the mortgage, the
policy may no longer be needed and may therefore not be renewed.
In case of early death the unpaid portion of the
mortgage can be paid out of the insurance proceeds, the balance
of the insurance money, if any, being payable to the
insured's designated beneficiary. In fact, any plan for the
accumulation of a fund through saving, no matter what the
method adopted, should, as already stated, be protected by an
insurance policy.

Related posts:
Term insurance

Term insurance

A term policy in life insurance may be defined as a contract
which furnishes life-insurance protection for a limited number
of years, the face value of the policy being payable only if
death occurs during the stipulated term, and nothing being
paid in case of survival. Sometimes such policies are issued
for business purposes for a period as short as one year, and at
various times such policies have also been issued upon the
"yearly renewable term plan," according to which the insured
could exercise the option of renewing the policy for
successive one-year periods, each year's premium being regarded
as the cost of that year's protection, and the premium
thus increasing as the policyholder's age advanced. While
this plan, also commonly known as "natural-premium insurance,"
is theoretically sound, it has proved impracticable in
actual practice, because it is apparent that under this plan
the premium would ultimately become prohibitive.

Owing chiefly to the aforementioned fact, the issuance of
very short term policies is limited at present to cases involving
business and financial transactions. In nearly all instances
term policies are written by American companies for
periods of five, ten, fifteen, or twenty years, although other
periods are sometimes used. Such policies may insure for
the agreed term of years only, or may be renewable for successive
term periods at the will of the insured and without
medical examination. Various restrictions are also imposed
by many companies in the issuance of term contracts, such as
limiting the size of the policy to a certain amount or the
length of the term so as not to carry the insurance period
beyond a certain stipulated age. Term insurance may, therefore,
be regarded as temporary insurance, and, in principle,
more nearly compares with a property insurance policy than
any of the other life contracts in use. If a building, valued
at $10,000, is insured for that amount under a five-year term
policy, the company will pay this insurance in case of the
destruction of the building during the term; but if at the
end of the specified five-year period the owner neglects to
reinsure the building by renewing the policy and a fire
thereafter ensues, the company is absolved from all liability
in view of the expiration of the contract. Similarly, if a
person insures his life for $10,000 under a five-year term
policy, either keeping the policy in force by paying a single
premium in advance or by paying, as is nearly always the
case, annual premiums from year to year, the company will
pay $10,000 in case of the insured's death at any time before
the expiration of the five years, nothing, however, being paid
in case death occurs after the expiration of the contract
period, the term life policy, like the fire policy, having expired
at that time.

Related posts:
Combination of Various Types of Policies