Term Insurance

Term life insurance provides protection against financial loss resulting from the death of the life insured during a specified period of time (or term). The policy pays a death benefit only if the life insured dies within the given period outlined in the policy. The period of coverage is usually for 1 year, 5 years, 10 years, or 20 years, or until a specific age, such as the life insured's age 65. At the end of the specified period, the insurance protection ceases, unless the policy is renewed. Depending on the type of policy, term life insurance coverage may terminate once the life insured has attained the age of 65, or the policy may continue to offer coverage up to age 75. A cynic might suggest that coverage is terminated during this age range because the insurance companies do not want to insure a risk class that represents a higher risk of dying. In actual fact, there are two valid reasons why insurance companies adopt this policy: The mortality cost each year after age 65 is very high. Few seniors are able to afford such rates, particularly when you add administrative and sales cost to the pure mortality cost. It becomes very difficult to underwrite life policies for those over age 65, because those people most interested in coverage tend to be in ill health, or at least to have health concerns. The potential exists for an insurer to incur substantial losses if it were to offer insurance coverage within this age/risk class. Term life insurance is often referred to as temporary insurance because it is ideally suited to cover temporary risks: risks that have an identifiable duration. Term insurance can be either renewable or non-renewable. What are the Advantages and Disadvantages of Term Life Insurance Term insurance can be either renewable or non-renewable. Non-renewable term is term insurance that cannot be renewed after the term of the contract has expired. At the end of the term, the policy expires without value. Should the insured wish to seek further coverage, he or she would be required to prove insurability based on his or her attained age. Non-renewable term insurance is used primarily by individuals who are required to secure a loan using life insurance and where there is no foreseeable need for insurance after repayment of the loan. The cost of non-renewable term is less than for a comparable amount of renewable term insurance. The renewable feature means that the policy can be renewed at the end of the term for another term, usually of the same duration, without further proof of insurability. At the time of renewal, the insured must pay the premium rate applicable for his or her attained age. Most importantly, regardless of how severely the health of the life insured may have deteriorated by the time of renewal, the coverage must be extended at the insured's option and the premium cannot be increased on the basis of the change in the life insured's health. Some policies specify the premiums that will be charged upon each renewal. Others permit the insurer to adjust the premiums based upon the mortality experience of the lives insured under the class of policy. The policy may give the policyowner the right to several successive renewals up to a specified age of the life insured. In each instance, the terms of renewal will be stipulated in the policy.rnWhat are the Advantages and Disadvantages of Term Life Insurancern Advantages The key advantage of term insurance is its relatively low initial premium. These low initial premiums make term insurance an affordable choice for applicants who have limited cash to commit for premiums, but who nevertheless require extensive coverage. The low premiums also make term life insurance an ideal choice when insuring specific risks for specific, finite periods. For example, term insurance would be an appropriate option where a parent's life needs to be insured until his or her children are financially independent. The availability of term insurance for terms as short as one year make it especially useful for business people who are required to insure their loans and want to do so at the least possible cost. Disadvantages The key disadvantage of term insurance is that the premiums become very expensive as the life insured reaches older ages. For many seniors the cost eventually becomes prohibitive. Moreover, most term policies cannot be renewed beyond age 80, which makes term insurance unsuitable for someone who needs lifetime coverage. The usual solution to these problems is to convert the term policy to a whole life policy or to buy some form of permanent life insurance as soon as the need for permanent insurance becomes both apparent and affordable and well in advance of the life insured reaching an advanced age. Term insurance does not have a cash surrender value; it only pays death benefits in the event that the life insured should die while the policy is in force. This can be a disadvantage for the individual who fails to pay a premium when it is due. Unlike permanent insurance, for which cash surrender values build up over time, there is no automatic borrowing facility to finance payment of premiums to keep a policy in force after the expiry of the 30-day grace period. Similarly, because term insurance does not have a cash surrender value, the insured cannot use the policy as collateral for a policy loan from the life insurance company.