Term Life Insurance

To protect your loved ones financially after your death life insurance is essential. One form of life insurance that you may wish to consider is term life insurance. A term life insurance definition is one that is taken out for a set period of time for death protection. By taking out term life insurance, if you die within the term, then the policy pays out. This can help your loved ones to cover financial costs after your death; it can also help to pay off large debts, such as mortgage after you have gone.

With many different types of life insurance available, there is one to suit every need. Term life insurance does provide many benefits to suit a range of people in a variety of circumstances but may not be right for everyone. Is term life insurance right for you?

What is term life insurance?

With term life insurance, you are in control. You can decide the amount that you want to be insured for. For example, you may choose a sum which would cover your mortgage or other outstanding debts. You can then also decide for the period of cover you wish to select. You will find a range of offers, but typically term life insurance cover lasts from one to thirty years.

Term life insurance works well as a short-term life insurance option. For short-term debts that may be paid off in a few years, then a short-term choice is ideal to protect your family from the repercussions of debt after your death.

The critical thing to note about term life insurance is that it adheres to strict time rules. If you die within the term, then the policy will pay out. If you do not die within the term stated, you will not receive a payout.

Term vs. whole life insurance – what’s the difference?

The main difference between term and whole life insurance is that term life insurance covers you for a specific time period whereas whole life insurance gives you coverage for life. Providing you keep up the payment of premiums, it gives you the longest life insurance policy.

Term life insurance is designed to give you death benefits only. However whole life insurance will provide you with lifetime benefits. This means you may receive a cash value accumulation that builds up throughout your time on the policy.

As you do not receive cash value benefits with term life insurance, it is often much more affordable. However, due to its term status, it can be much more expensive as you age. Typically, term life insurance is best suited for young families who want to protect loved ones from the costs of a debt such as paying for college or a mortgage. Term life insurance premiums depend heavily on age as a factor, so younger individuals are likely to receive a cheaper deal.

The affordable nature of term life insurance makes it an attractive option, but bear in mind that a whole life insurance policy may save you more money in the long term, particularly if you stay with a policy for many years and it accumulates a cash value.

Types of term life insurance

There are various types of term life insurance, which can help you to find the right one for you. Some of the more common types of term life insurance include;

Level term

Level term is a simplified insurance type where you receive a lump sum upon your death within the specified term. The receive this, the insurer will usually ask for regular fixed-price premiums in a monthly or annual setup. With this, you can choose the length of cover and amount you want based on a debt that you want to cover. Often this works best for people with interest-only mortgages.

Decreasing term

During the period with a decreasing term policy, the amount you want to receive decreases throughout the term. This type of policy may mean that your premiums will become cheaper as time goes on. A decreasing term life insurance can be ideal for a debt that decreases over time, such as a repayment mortgage.

Family income benefit

To help with financial planning, family income benefit is another form of decreasing term life insurance. With this, it can provide your loved ones with financial stability by paying out a regular income until the policy expiry date. In some cases, a regular income may be easier to manage than a lump sum as it can match your take-home income for a while.

What’s important to note with this type of policy is that it will last for as long as your policy, if you die within the first year of the policy, your family will receive a substantial amount covering the rest of the policy. If you die in the last year of the policy, your family may only receive a couple of payments.

Return of premium

Some insurers offer a return of premium life insurance rider. A return of premium means that if you keep your policy in force for the entire term and you do not die during the policy term, the insurer will refund the premiums that you paid. This type of policy will raise the cost of the premiums but offers a win-win as the insurer does not have to pay out death lump sum and you receive premiums back.

One consideration with the return of premium policy is that you are usually locked into a policy until the end whereas a standard policy you may be able to cancel and take up a cheaper option.

Features of term life insurance

Different insurers will offer a range of features within their term life policies. These features can make a policy more enticing for you and provide value for money. Some of the features to look out for, or specifically request include;

Accelerated death benefit

Should the policyholder become terminally ill, an accelerated death benefit will mean the insurer may offer a chunk of the policy payout, while the policyholder is still alive.

Accidental death benefit

Should the policy holder’s death be accidental, some insurers may offer a more significant payout. Some policy types will offer double or triple the payout in the event of an accidental death.

Disability waiver premium

Another feature that may be included in term life insurance policies is a disability waiver premium. This means that if the policyholder suffers a long-term disability, their premium is waivered.

Convertibility

Term life convertible policies allow you to convert your term life policy into a whole life insurance policy. Some insurers will offer this as a feature during the first few years of the policy. Other insurers will allow you to convert the policy from term to life at any time.

Convertibility is a great feature that can help you if you realize you need longer coverage for example if you have been diagnosed with failing health. One of the benefits is that convertibility often means you do not have to provide further evidence of insurability. With convertibility, you have a benefit of converted term life insurance with no medical exam.

What is the difference between term life insurance – standard vs. preferred

While term life insurance is one of the most affordable types of life insurance, there is a way to make it even cheaper through differing standard and preferred policies. With preferred term insurance you can enjoy cheaper premiums providing you are in an excellent state of health and comply with the insurer’s preferred standards.

As with other life insurance policies, term life insurance will usually require evidence of insurability; this typically takes the form of a medical examination. So, the younger you are and healthier your lifestyle is, you are more likely to receive a preferred status which may reduce your premiums.

Advantages of term life insurance

• Typically, term life insurance rates mean you can receive the greatest death benefit for the lowest price
• Lower initial premium cost compared to whole life insurance
• It is not linked to the probate estate which means the beneficiary will be paid quickly without undue administration issues
• Pay a set amount which is ideal for budgeting
• Enjoy a high level of urgent protection for debts and current expenses
• Ideal for temporary issues and younger individuals who have immediate debts that will eventually disappear.

Disadvantages of term life insurance

• The policy ends when the term ends
• As term life insurance can be age-dependent, you may see an increase in premiums if you decide to renew the policy
• After every term, you will have to provide evidence of insurability
• If you fail a medical exam, this may lead to higher premiums, or you may not qualify for the policy.

Understanding term life insurance

Who can be the owner of the life insurance? Typically, the owner of the policy is the one who is insured. When the owner of the life insurance policy dies, then the beneficiaries may receive the pay-out. It is possible for the owner of the policy to be more than one person, or a trust or corporation. Businesses may offer and own the life insurance on behalf of their employees.

What is the difference between the payor and payee of a life insurance? While a payor of a policy is usually the policy owner or the insured, other payors could include parents of a minor or for a child with a disability. Conversely, a payor may be children paying for older parents. When a payor is different from a person who is insured, insurers will want to know the relationship between the two.

Can you transfer ownership of a life insurance? Policy owners have the right to transfer ownership rights. Often insurers will ask that the policy owner has an insurable interest in the person who is insured, such as a spouse or family member.