Life insurance in the United States has a long history which reaches as far as the early 1700s when certain churches set up pooled funds to support people in difficult circumstances like widows and orphans. Through the years the concept has mushroomed into a huge multimillion business and has a presence in all American households.
Life insurance is basically a contract between an individual and a provider. As per the agreement, the individual pays a regular (or sometimes lump sum) premium over a period of time usually the duration the individual’s life. In return, the provider makes a payment to the individual against his or her life.
Term life insurance is an offshoot of general life insurance and is the most popular form of life insurance in the U.S. Here, the premium is also defined, but the individual has to pay only for a fixed number of years known as the term. The coverage period is restricted to the term defined in the contract. If the policyholder lives beyond the term, there is no payment made. However, if the policyholder dies within the term, then the beneficiaries get paid according to the agreement.
All insurance contracts are based on factors called rates. The same applies to term life insurance in the U.S. These rates are used to calculate regular premiums (annual or monthly), expressed in dollars. The rates of term life insurance are far less than those of general life insurance. The reason for this is that in the former, benefits are guaranteed, but in the latter, there is no such guarantee. If the policyholder survives the duration of the term, the policy lapses and no value is given out.
Term life insurance is popular because it is cheaper. However, one should make an accurate choice while choosing a term life insurance policy. Today in the U.S., there is a huge range of life insurance companies and policies. The factors which influence different rates in term life insurance are several and a person who is about to take out a policy should be aware of these factors.
The age factor and marital status: The primary consideration is the age of the individual as well as marital status with or without children. A whole of life policy would be suitable for an older person whereas a young person with a spouse and growing children would be better off with term life insurance probably covering the critical years from marriage to when their children become independent.
Tobacco use: This is a major factor in the definition of insurance rates. There are different rates for smokers and non-smokers.
Medical conditions: Depending on the medical status of an individual, the rates are fixed and there are special clauses for particular illnesses and medical conditions. One should take the medical condition into consideration while choosing a term life insurance policy as there are different policies for people with certain medical conditions. For example people with terminal illnesses like cancer and AIDS may be better off selecting policies tailored to such conditions and not term life insurance.
Hazardous jobs: Here again, a person who has a hazardous job will always have a lower life expectancy than one who goes to an office and sits at a desk all day. Therefore, this will also affect the rate. A person with a hazardous job would probably do well to take out term a life insurance policy for the duration of the job.
Dangerous & risky hobbies: Some people have dangerous hobbies like skydiving, motors sports, mountaineering and diving, etc. Such people are likely to be excluded from regular term life insurance policies. There are however clauses in some policies which allow a person with such hobbies to take out a policy but maybe with higher premiums and stricter underwriting.
This is then the description of term life insurance in the U.S. – how it works and the various scenarios which influence the way the policies are written.