Term Life Insurance
What Is Term Life Insurance?
Term life insurance, also known as pure life insurance, is a type of life insurance that guarantees payment of a stated death benefit if the covered person dies during a specified term. Once the term expires, the policyholder can either renew it for another term, convert the policy to permanent coverage, or allow the term life insurance policy to terminate.
KEY TAKEAWAYS
- Term life insurance guarantees payment of a stated death benefit to the insured’s beneficiaries if the insured person dies during a specified term.
- These policies have no value other than the guaranteed death benefit and feature no savings component as found in a whole life insurance product.
- Term life premiums are based on a person’s age, health, and life expectancy.
How Term Life Insurance Works
When you buy a term life insurance policy, the insurance company determines the premiums based on the value of the policy (the payout amount) as well as your age, gender, and health. In some cases, a medical exam may be required. The insurance company may also inquire about your driving record, current medications, smoking status, occupation, hobbies, and family history.
If you die during the term of the policy, the insurer will pay the face value of the policy to your beneficiaries. This cash benefit—which is, in most cases, not taxable—may be used by beneficiaries to settle your healthcare and funeral costs, consumer debt, or mortgage debt among other things. However, if the policy expires before your death, there is no payout. You may be able to renew a term policy at its expiration, but the premiums will be recalculated for your age at the time of renewal. Term life policies have no value other than the guaranteed death benefit. There is no savings component as found in a whole life insurance product.
Term Life Insurance Explained
Because it offers a benefit for a restricted time and provides only a death benefit, term life is usually the least costly life insurance available. A healthy 35-year-old non-smoker can typically obtain a 20-year level-premium policy with a ₹1,00,00,000 face value for ₹450 to ₹750 per month. Purchasing a whole life equivalent would have significantly higher premiums, possibly ₹12,000 to ₹15,000 per month. Because most term life insurance policies expire before paying a death benefit, the overall risk to the insurer is lower than that of a permanent life policy. The reduced risk allows insurers to pass cost savings to the customers in the form of lowering premiums.
Example of Term Life Insurance
Thirty-five-year-old Ajay wants to protect his family in the unlikely event of his early death. He buys a $1,00,00,000 50-year term life insurance policy with a premium of ₹1,500 per month. If Ajay dies within the 50-year term, the policy will pay Ajay’s beneficiary ₹1,00,00,000. If he dies after he turns 85, when the policy has expired, his beneficiary will receive no benefit. If he takes new policy after 10-years, the premiums will be higher than with his initial policy because they will be based on his age of 45 instead of 35.
Types of Term Life Insurance
There are several different types of term life insurance; the best option will depend on your individual circumstances.
1. Level Term
These provide coverage for a specified period ranging from 10 to 50 years. Both the death benefit and premium are fixed throughtout the policy term. Because actuaries must account for the increasing costs of insurance over the life of the policy’s effectiveness, the premium is comparatively low than Return of Premium term life insurance.
2. Return of Premium Term Plan
Retun of Premium policies have guaranteed maturity benefits at the end of policy term. The advance in Return of Premium is, if nothing happens till maturity you get back your paid premiums excluding GST. Although there is no specified difference in terms & conditions between level term & Return of Premium, premiums can become prohibitively expensive as individuals age increases, making the policy an attractive choice for many young handsome.
3. Decreasing/Increasing term policies
These policies have a death benefit that declines/increases each year, according to a predetermined schedule. The policyholder pays a fixed, level premium for the duration of the policy. Decreasing term policies are often used in concert with a mortgage to match the coverage with the declining principal of the home / business loan. Increasing term policies are usually taken when there is increasing inflation rate and standard of living cost year on year.
Benefits of Term Life Insurance
Term life insurance is attractive to young people with children. Parents may obtain large amounts of coverage for reasonably low costs. Upon the death of a parent, the significant benefit can replace lost income.
These policies are also well-suited for people who temporarily need specific amounts of life insurance. For example, the policyholder may calculate that by the time the policy expires, their survivors will no longer need extra financial protection or will have accumulated enough liquid assets to self-insure.
Cost of premiums
Term life policies are ideal for people who want substantial coverage at low costs. Whole life customers pay more in premiums for less coverage but have the security of knowing they are protected for life.
While many buyers favor the affordability of term life, paying premiums for an extended period and having no benefit after the term’s expiration is an unattractive feature. Upon renewal, term life insurance premiums increase with age and may become cost-prohibitive over time. In fact, once term life policies are issued, premiums is fixed.
Availability of coverage
Unless a term policy has been issued for whole life i.e. 100/99 or 85 age of individual, the company could refuse to issue coverage at the beginning of a policy’s term if the policyholder developed a serious illness or has any health problems. Whole life insurance provides coverage for life, as long as premiums are paid.