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Term Life Insurance Explained

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  • December 11, 2014 7:31 PM
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There are several types of life insurance policies available and each is designed to meet the needs of a specific demographic and circumstance. In this article we provide information on term life insurance.

What Is Term Life Insurance?

Term life Insurance is designed to provide life insurance protection to you for a set period of time – the “term”.  It is widely known as the simplest type of life insurance policy because it is very easy to understand and even easier to purchase.

At the outset the proposer selects the length of time they want the coverage to be in place for and the amount of money they would like to receive in the event of a claim. This is known as the sum insured.

The person on whom the life insurance is being taken out on is disclosed at this time and whilst the proposer is most commonly the life insured (they have taken out a life insurance policy on their own life) it is also common for a person to insure the life of another – for example a man insuring the life of his wife. It is only possible to purchase life insurance on the life of someone whose death would have a quantifiable financial impact on your life and there are lots of rules governing this. For example you would not be permitted to take out a policy on the life of Madonna – this would be gambling, not true insurance – however you would be permitted to protect the life of your business partner as his untimely death would likely harm your business and cause you a loss.

Once these terms have been accepted by the insurer and the policy has incepted it will run for the length of time selected, as long as the proposer continues to pay their insurance premium of course.

In the event of the insured person dying during the policy period (the “term”) the Insurer would pay out the pre-agreed sum.

This differs from some other life insurance policies which allow for the sum insured to increase over time in line with inflation. This is just one of the reasons that term life policies are much more affordable.

The other reason is that if the life insured does not die during the set term, the policy will expire and insurers will not have to pay out the sum insured. Again this is different from other policies (whole life), which have no end date and are guaranteed to pay out at some point.

Term life is therefore a great budget policy and has become the most popular type of life insurance coverage on the market.

Who should buy it?

People often buy this type of policy when they purchase a property. If a 30 year mortgage has been taken out by a couple to the value of $300,000 it would be wise to purchase a term life policy on the same basis – a 30 year term paying out $300,000 in the event of the death of one of the owners. This gives peace of mind that should the worst happen – the property can still be paid for and nobody is going to lose their home. It is not unusual for a mortgage company to insist that this type of coverage is taken out at time of purchase as it gives them a guarantee that their loan will be repaid. Decreasing life insurance could also be a good option here.

Someone else might take out a term life policy if they had loans or other debts that they wanted to be repaid in the event of their death. This is particularly important if you are concerned about your debt becoming the burden of your family members.

Alternatively others buy the product because they want to be able to leave a set amount of money to their family upon their death. It’s possible to name beneficiaries and so you could buy $1,000,000 worth of term life insurance and arrange for $200,000 to be given to each of your 5 children upon your death.

Finally a term life policy could be used as collateral against future borrowing. Be aware that your lender will likely want to be named as a beneficiary.

What else do I need to know?

  • The earlier you purchase your policy, the cheaper it will be. This is a combination of an increased risk of death due to your age but also the older you get the more pre-existing conditions you are likely to have (these must be declared) and this will have an impact on your premium. Because of this it is wise to buy your policy sooner rather than later. Those heading towards retirement will have limited options and will have access only to selected specialists.
  • Policies should be reviewed regularly. If, as per my example above, you were to take out a $300,000 life insurance policy due to your new property purchase, it’s important to review the policy should you upsize later on and take out a larger mortgage. Similarly, should you go on to have children it is wise to consider increasing your sum insured to ensure that you leave behind enough money to pay for their care. A good rule of thumb is to review your policy every 2 years.
  • Some term life policies will pay out early if you are diagnosed with a terminal illness. There are of course subjectivities here, one of which is that you must be predicted to die within 12 months, but this can be a great benefit that allows families to spend those last months together with financial security. Always check your policy wording as this benefit will be excluded from the cheapest of policies.
  • With most term life policies when your premium is set at the outset it will never change. If you pay $15 a month now, you’ll still pay $15 a month in 10 years’ time.
  • At proposal stage the Insurer will want your full medical history. It is important that you fully disclose everything as if you fail to do so and you subsequently die from that illness, you may find that the policy does not cover you.

To summarise, term life insurance is a budget policy that will pay out a pre-agreed limit should the insured life die within the set policy term. It’s a product that should be considered by anyone with financial commitments and provides excellent peace of mind for the insured and their beneficiaries.

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