What are the Limitations of Term Life Insurance Policies?
If you are considering the purchase of a temporary (term) life plan, you may be wondering what the limitations or drawbacks may be to this type of life insurance policy.
Actually, there are several important limitations to a Term Insurance policy.
Common Limitations of Term Life Insurance
Duration of Term Policy
Usually, a term life insurance policy provides coverage for a period of up to thirty years. You may be able to choose a "Policy Term" (duration) of 10, 15, 20, 25 or 30 years of protection.
Rates Increase at Renewal
If you choose to renew your term life policy when your coverage expires, the cost to renew your term insurance for an additional "Term" (usually for 10 years) will be higher per year than your original term insurance policy, because you are older at that time.
You May Outlive Your Insurance
Since term life is temporary coverage, you may outlive the duration of your life insurance policy. That means, there will be no benefits paid out on your insurance.
Term Life Exclusions, Restrictions and Limitations
Most life insurance policies include a series of exclusions, restrictions, or limitations in the policy that is designed to withhold payment under certain circumstances.
Most life insurance companies do not pay out should the insured be involved in "Acts of War" or "While Active in the Military Service".
Furthermore, most life insurance companies will not payout if the insured commits Suicide within a specified period of time after policy issue (usually two years).
There is also a Contestability Period in the first two years you are insured. The insurance company may contest a claim if you die from a material representation on the application for coverage. Such as, if you said you don't smoke but you die from lung cancer within two years of getting insured.
What is Term Life Insurance?
Term life insurance covers the insured for a specific period of time. If the insured person dies within the specified period, then the life insurance pays out.
For Term life insurance, the premiums increase as the insured ages, through your annual premium is locked-in to remain the same for the duration of your level term life insurance policy, usually for a period of 10, 15, 20, 25 or 30 years.
Term life insurance does not offer a cash value option so there is no way to borrow against a term policy and there are no investment options available.
Term life is Pure Protection, providing only a death benefit, not any type of investment.
Health and Background Evaluations
Life insurance companies are allowed to evaluate an individual based on a series of criteria. Based on the answers to these questions, a company can deny coverage to an individual or increase premium rates based on those answers. Some of the criteria they need to determine coverage and cost are:
Limits of Coverage Amount
There are also limitations on the amount of life insurance coverage someone can purchase. Insurance carriers usually have upper limits to policy payouts; such as, $5,000,000 or less, depending on your age ad health.
Common Exclusions in Term Life Insurance Policies
Suicide Clause
This is a common clause that excludes payment of benefits if suicide occurs in the first two years of the policy.
War Exclusion
This exclusion is pretty self-explanatory and also pretty obvious as why it is needed.
Usually used in times of war, this exclusion excludes payment during times of war.
There may be life insurance policies available on a group basis or through the government for active duty personnel.
Aviation Clause
This clause would exclude payment during an aviation accident outside of one that occurs on a standard airline scheduled flight (i.e. the passenger on one of the major carriers.
This falls under the umbrella of hazardous activities, occupations, and activities and is primarily geared towards pilots.
Hazardous Activities
Continuing with the hazardous activities, occupations, and hobbies theme, some additional exclusions may apply to activities such as race car driving, bungee jumping, scuba diving, hang gliding, and sky diving.
It's important if you engage in these activities to a) make sure to accurately list them on the application for coverage and b) understand whether the policy you have chosen excludes payment due to death resulting from these activities, or charges an additional premium in order to cover them.
It's important to understand up front how your life insurance policy will address these issues.
Contestability Clause
Another common policy limitation is the contestability clause.
If an insurance company determines there was misrepresentation during the term life insurance underwriting process (usually application/paramedical exam) within the first two years of the insurance policy being "In-Force", the carrier can contest the contract and potentially not pay out any benefits.
That’s why it is so important to accurately answer all questions during the application process for life insurance coverage.
It makes no sense to falsely qualify for life insurance only to have it not pay out when you most need it.
Term Life Insurance Quotes
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Resources:
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Term Life Insurance Limitations
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