As the name suggests, term life insurance is life insurance you buy for a certain term of time. As these policies don’t have any cash value component, the premium amounts you pay is used only for keeping the policy active.
These premium amounts have to be paid only for the term of the policy, and when the term or policy terminates, you stop paying premiums as your coverage expires. Thus, term life is one of the cheaper life insurance plans available.
Term insurance is however divided into level term where your premium and death benefit remains constant for the entire length of the term, no matter if it’s 10, 20 or 30 years long.
Usually, term insurance policies are acquired for specific terms spanning from one to 20 years. Moreover, at the end of the term, you don’t receive any return on all the money you had paid towards the policy.
When Your Policy Terminates
However in case you die before the term terminates, your loved ones receive the policy’s full amount. Term insurance rates remain locked for the same amount, and are much cheaper than whole life policy rates.
As premiums of a term life policy is about 10% of that of a whole life insurance policy, they are often a better choice. On the contrary, whole life insurance policies offer protection plus investment opportunities.
When term policies mature, they expire without any investment. This is nothing to worry about as it’s always better to pay for protection, and use the remaining money for wise investments.
Moreover, once the policy expires, you don’t actually need insurance anymore as you have sufficient savings to depend on. Most people get this insurance coverage so that they can reduce debts as they get coverage till they retire, wherein most of their debt is paid off.
Decreasing Term Policy
In these policies, the death benefit of the policy reduces every year, while its premium amount remains the same. In fact, when the policy terminates, the death benefit usually reaches zero.
Annual Renewable Term
In case of these policies, the death benefit remains constant for the term of the policy while the policy is renewed annually wherein the premium amount increases every year. While premiums are at first lower than premiums for a level term plan, with time, they become rather expensive.
Term Life Insurance Disadvantages
Term life insurance policies have no cash value element as the premium amount you pay goes to the policy coverage and does not earn or accumulate interest. Sometimes, having insurance only for a specific term can be a drawback.
Supposing you have a 20 year policy, and after these 20 years you decide you want to extend your coverage, you will have to undergo insurability testing again and you could be denied any additional protection. If you do get additional protection, then your policy will be renewed at a higher premium.
These insurance policies are cheaper than whole, universal and variable life insurance policies. Accordingly, you can buy only as much coverage as you require. Term life insurance policies only provide specific coverage periods of 10,15,20,25 and 30 years.
So if you are worried about getting life insurance while you have dependants to look after at home, or mortgages to pay, you will now be able to decide how much of coverage you require, and for how long.