life insurance cover

Term Life Insurance

Term life insurance is the original form of life insurance. It is considered by many people to be pure insurance protection because it has no cash value.

This insurance is of a temporary nature as it covers only a specific period of time, the relevant term. Because of this the primary use of this insurance should be to provide for covering temporary financial responsibilities of the insured. These responsibilities would include consumer debt, mortgages, and dependants requiring income and college fees along with many others. If the insured party dies during the term, the death benefit will be paid to the beneficiary. Because the term is generally of a short term it usually expires, therefore meaning that the insurer often does not have to pay out. This makes term insurance the most inexpensive way to purchase a substantial death benefit on a coverage per premium basis.

Term Life insurance has two terms, an annual renewable term and a level term. The simplest form of term life insurance is for a period of one year. If the insured party died within this year, the insurance company would pay the death benefit. If however, they died just one day after this year no benefit is paid out. The premium that is paid by the insured party would therefore be the expected probability of the insured dying in that one year plus a cost and profit amount for the insurer. As the probability of the insured dying the next year is very low, not many people would have the insurance term for only one year. An option that is more commonly purchased is an annual renewable term (ART). For this term, the premium is paid for one year coverage but the policy is guaranteed to be able to continue each year for a given number of years. This period varies from 10 to 30 years or in some instances until the insured party is 95 years old. As the insured ages, the premiums understandably increase.

Level term life insurance is a more common insurance than annual renewable term insurance as the premium remains the same for a given amount of years. The more common periods being 10, 15, 20 and 30 years. The premium paid each year is the same and is the cost of each year’s annual renewable term rates averaged over the term with a time value of money adjustment made by the insurer. Therefore, the longer the term the premium is level for, the higher the premium as the older more expensive to insure years are averaged into the premium. Some level term programs include a renewal option and allow the insured party to renew their policy if the insured period needs to be extended.

After the agreed time of the policy has expired, the policy holder must decide whether to renew the term life insurance policy or to let the coverage terminate. Obviously if they do not renew the policy and something happens to them, their family will not receive any payments. This would therefore be highly unadvisable.

A disadvantage to having a term life insurance policy is that is very unlikely that the death benefit will be paid out. One research company placed the percentage as low as 1% of policies paying this benefit. This is the reason why these policies are able to have such a low premium as they are receiving incoming money for policies but very rarely need to pay anything out.

This term life insurance is in contrast with permanent life insurance such as whole life, universal life and variable universal life as it is based on a specific time period whereas the duration of permanent life insurance extends until the policy holder reaches 100 years of age (i.e. until death). The term life insurance policies provide a stated benefit upon death of the policy holder, provided that the death occurs within a specific time period. However, the policy does not provide any returns beyond the stated benefit, unlike permanent life insurance policies, which have a savings component that can be used for wealth accumulation.

If you are a fit, healthy person, no matter of your age and you expect to live for a number of years, it may be worthwhile investing in a permanent life insurance as this insurance will last until you die without the need to renew the policy.