What is Term Life Insurance
This is life insurance that will cover you for a set period of time. The term itself is negotiable depending on your requirements. Your premiums are set at a fixed rate. Upon expiry of the term you have chosen the insurance ceases and you have the option to renew for a further set period. If you do not make a claim on the policy there is no pay out and your premiums will not be refunded. This works in much the same way as car insurance, or home insurance. The difference between Term Life Insurance and Life Assurance is that with the former you are insuring against an event taking place and with the latter you are assured of a payment in the case of the event occurring.
Why choose Term Life Insurance?
Term Life Insurance provides an immediate, tax-free benefit upon the death of the insured party. The premiums are often much cheaper than those charged on permanent life insurance or life assurance policies. It can be used to bridge a gap of financial uncertainty, providing peace of mind that dependants would be provided for in the matter of the policyholders untimely death. It could also provide payment for funeral costs and other expenses the policyholder would not otherwise have been able to take care of at that time.
As an example, consider an individual who has invested heavily in a business. They are confident that within a period of 5 years they will be financially comfortable and able to take care of all their obligations with relative ease, however during that 5-year period their finances would be severely compromised if the individual died. A term life insurance for that period would be a relatively cheap way to provide security for the policy holders family.
How long a term should you choose?
This will depend on your personal circumstances. You can choose to renew on an annual basis but may find that it is difficult to obtain renewal quotes as you get older. For example, you may become terminally ill during the insured term but find you cannot then get insured for a second term, as you are considered too high risk to be insured. There are policies that will guarantee you the option to renew without proving your insurability but you will find the higher risk for the insurer is reflected in the higher premium you pay.
Many people prefer to opt for Level Term Insurance as opposed to the Annual Renewable Term (ART) described above. You pay a fixed premium over an extended term, more commonly this would be for 10, 15 or maybe 20 or even 30 years in duration.
You would be risk assessed based on the duration of the term. This means that the premiums for the later insured years would be higher than the premiums for the early years. The total cost would be averaged out so that your premiums remain fixed for the duration of your policy.
Many Level Term Insurance providers will offer the option to renew but you should check the small print to see if you need to provide proof of insurability, and whether they have guaranteed a cap on the maximum rate you would need to pay.
Is it worth the money?
Term life insurance can provide protection at a very reasonable premium compared to other options. The reason the premiums are often cheaper than other insurance plans is because the likelihood of a term insurance policy paying out is quite low. Various studies within the insurance industry suggest that there is as little as a 1% chance of a claim actually being paid out. However there is a benefit in that as payouts are traditionally low the insurance provider can often offer a much higher coverage in relation to the premium than other insurance plans would offer.
The choice is ultimately yours.
David Nealson is a finance journalist and freelance writer who has focused on the insurance services industry. His in-depth analyses expose little-known features and help consumers better understand the products they are offered. Look through the extensive overviews of Legal & General life insurance and Prudential life insurance covers.