Guide: Term Life Insurance
A 'term life insurance' policy provides a guaranteed death benefit to your beneficiaries if you die during the agreed term.
For example, you take out a policy for 50 years, you pay £10 per month and if you die within those 50 years, the insurance company pays out the amount of cover you bought, £250,000 (these figures are just there to help you understand how this works).
Carrying on with that same example, if you don’t die in the 50 years you took cover out for, you will need to buy a new policy when it expires.
A term life insurance comes with many benefits, the first in line is its affordability compared to other types of life insurance
Source - @homajob
Types of term insurance
There are 2 types of term insurance.
Decreasing term life insurance
Decreasing term insurance is where the amount paid out when you die, decreases year on year. The idea is that the insurance is there to cover your mortgage. As you repay your mortgage over time, the balance you owe decreases and so the payout you receive from your insurance decreases accordingly.
Level term insurance
Level term insurance is there to protect your loved ones financially when you pass away. You choose the amount of cover you want (known as the sum insured) and the time you have the policy for (known as the 'term'). As above in our example, your monthly repayments (premiums) are fixed for the entire term, as is the payout you receive.
Reasons for choosing term life insurance
Life comes with unexpected changes. Some of those changes might trigger a sense of insecurity if you are financially responsible for your loved ones. A life insurance policy will provide a financial cushion in the case of your sudden demise.
Here are just a few of the key changes in life and the financial responsibilities associated with them that might compel you to opt for a term life insurance cover:
- Marriage: Your financial responsibility as a spouse.
- Parenthood: Having an insurance payout will cover their day to day expenses, University fees and will help them cover end of life expenses for you (burial costs, final paperwork, etc)
- Upsizing: Usually, when you move to a bigger house, you will need additional coverage to pay your outstanding mortgage if you happen to die during the term.
Key components of term life insurance
- Premium: This is the amount you pay the insurer, usually monthly, in return for the cover they give you. There are 3 types of premium payments in Term life insurance:
- Regular: This is the most basic one, where you pay monthly payments for the duration of policy coverage.
- Limited: In this case, you can opt for paying higher premiums in the first few years of the term. Your policy will still remain active after you are done paying the premiums.
- Single: This is a one-time premium payment paid upfront to the insurance provider. You can opt for a one-time payment for most policies up to a 30-year term.
- Death Benefit: Death benefit refers to the amount of money that your insurance company will pay your beneficiaries in the case of your demise. When you take out the policy, you estimate how much you might need based on your lifestyle, mortgage balance and future needs.
However, speaking with a professional advisor will give you a much better understanding of what to cover and how much cover you need.
- Beneficiary: This is the person you will list in your term life insurance papers who will receive the death benefit when you die during the term of the policy.
- Renewable: Most term life insurances are renewable after the term expires. You can opt for higher coverage, or choose a different term upon renewal of the policy. This is not guaranteed though or automatically done.
Top features of term life insurance
- Your beneficiaries will be granted a death benefit (payment) when you die
- You can name the beneficiaries as anyone you like
- The policy is for a specific term, not for your whole life
- The term and premium payments depend on several factors, such as your age at the time opting for term life insurance, your health status, and your gender (women typically live longer than men). These are calculated at the start of the policy
- The premiums cost far less compared to whole-of-life insurance.
- A term life insurance’s death benefit is not just for settling end of life costs such as your funeral.
- It’s intended to cover outstanding debts, mortgages, and you provide for your loved ones
- You may also be paid if diagnosed with a terminal illness but this differs between policies
Factors in the application process
The insurance provider will go through the process of evaluating your credentials before giving their final verdict. This process is called underwriting and involves considering several factors that can affect your term agreement and purchase value.
- Health status: The insurance provider will assess your medical condition as well as your family's medical history. If you have a high life expectancy based on your medical records, you will be charged fewer premium payments and vice versa.
- Smoking: smokers are often charged higher premiums because of the risk they bring to the table.
- Age: Premium payments increase as you age. An estimate suggests that the charge increases more than 8% every single year.
- Gender: As discussed above, women outlive men by 8 to 10 years.
Employment Status: Some people are at risk of early death because of the type of job they do, for example, scuba divers compared to someone with a desk job. These factors could increase or decrease the likelihood of getting life insurance.
- Income: Next in line after employment type and status is your annual income. The higher your income, the more coverage you may wish to take out
- Coverage in force: The underwriter could notice that you have other insurance coverage, for example, health insurance and employment insurance. They could then make sure that you are getting the right amount of life term insurance coverage and that it aligns with your overall financial stability status.
Limitations of term life insurance
Term life insurance is extremely beneficial for many. However, it is also important to consider its limitations. Some of the limitations of term life insurance are listed as follows:
- It doesn’t have any cash value equivalent.
- There is absolutely no payout if you outlive the policy’s term duration. You will have to apply for renewal.
- The older you are the more expensive it becomes. However that means the younger you are when you buy life insurance, the cheaper your premiums are likely to be. Because your premiums are fixed throughout the term of the policy, it's an incentive to look for cover sooner rather than later