Hello, everyone! Welcome to my Personal Insurance Information Series. This series is designed to give you the basic knowledge you need to make informed decisions when purchasing personal insurance.Heather
What Is Term Life Insurance?
Term Life Insurance got its name because of its intended purpose; it is designed to be a low cost, short-term life insurance solution.
Term Life Insurance is a guaranteed policy that pays out upon your death. You must be in good health and under the age of 70 to qualify.
Young healthy successful people don’t die very often. However, in the rare event that someone from this demographic does die they need very high amounts of life insurance to cover their obligations.
People in this phase of life have many dependents whose needs must be provided for after their death. This can include a spouse, children, and aging relatives. Car loans and mortgages also need to be settled to create clean titles for inheritance.
Term life insurance is designed for the large payouts that are necessary to settle the estate of a young, healthy person with dependents and debt. Since the insurance company doesn’t have to pay out very often, they can charge low premiums for high coverage.
“Term” also refers to the period of time that the rate is guaranteed for on these policies before going up. For a term 10 policy, the rate increases every 10 years.
There are also term 5, 15, 20, 100 and variable term policies available, depending on the insurance company offering the policy.
It is very important to look at the average payment for the length of time you want the policy to last, not just at the initial payment.
Typically, term insurance ends by age 85, but you will likely want to cancel it long before then due to cost versus benefit.
Do You Need Term Life Insurance?
When your insurance representative conducts your needs analysis, they will ask questions about your family and debt. If you have a family and you are the main income earner, there is a higher need for term life insurance than if you are a young bachelor. Debt also plays a role in determining the need for term insurance.
If you would be leaving a family behind you would want to provide enough money to provide a source of income for a period of time. The death of a loved one can be devastating for the survivors and time off from work and counseling may be needed. Also, if children are young, there can be the desire to leave enough money to help provide for their upbringing and education.
Heavy Debt Load
A heavy debt load is not the inheritance you want to leave to your loved ones. Creditor insurance is not something you can rely on, and only takes care of one specific debt. In Canada, a good term policy can have a beneficiary named in the policy and bypass the estate entirely. The payout from a life insurance policy in Canada is not taxable to the beneficiary. Tax implications for this can vary by country, so be sure to check with your advisor for the rules in your country.
Some young adults just entering their 20’s will get a term policy as it is fairly inexpensive, to preserve their insurability for permanent insurance. Sometimes people do not feel financially ready to pay for a permanent policy when they have just begun a job. The younger you are when you get a permanent insurance policy, the less it will cost.
Converting Your Term Insurance Policy
Most good term insurance policies are also convertible, which allows them to be changed to a permanent policy. The ideal way to get a permanent policy is to apply for it directly since that will be cheaper, but, if you have become uninsurable, the ability to change the term policy to a permanent one is a good option.
Term Life Insurance Buying Tips
In summary, term insurance is a low cost, high payout option that has an important place in your insurance portfolio, BUT you may want to reapply a few times to keep costs low. You will also not likely want to keep it until old age. A permanent insurance solution is always important to have as well.
If possible, choose to get the longer term (term 20) if you will need the policy for a period of time longer than 10 years. Term 5 insurance is not usually available other than as part of a group insurance package, and should often be avoided due to the higher costs over time, causing the overall cost of insurance to be higher than for a Term 20.