During the course of a long life, there might be periods of highs and lows. To ensure that you are prepared for everything that life might throw your way, there are life insurance policies such as term and whole life insurance.
While no one wants to think about their own life expectancy, life insurance policies- in whatever form- provide a certain level of security and protection to the loved ones we leave behind.
Understanding term life insurance
At the heart of term life insurance is the fact that this coverage is only for a set period of time. This means that, should the policyholder pass away within the period of coverage, beneficiaries will receive a death benefit.
On the other hand, if you were to pass away after the policy expires, no benefit would be paid. This means that everything from funeral costs to ongoing living expenses will solely be the responsibility of living family members.
How it differs from whole life insurance
When it comes to life insurance, many individuals are familiar with whole life insurance. As in, insurance that remains in effect for the entire lifetime of the insured. As such, whole life insurance is often referred to as traditional life insurance.
On the other hand, term life insurance will expire after a set period of time. This makes it a great source of comfort for those wanting a backup should an illness become serious or in the lead up to children going to college.
How it works
Essentially a contract between the insurance company and the policyholder, there are two main decisions to make when taking out coverage. Firstly, the length of the term. Typically, term life insurance policies can be taken out for periods of 5, 10, 15, 20, 25 and even 30 years.
The second decision revolves around the coverage amount. The amount will depend on why you are taking out term life insurance in the first instance. For example, you may want to help cover the years remaining on a mortgage so your family doesn’t have to sell the house.
It’s worth noting that there are factors that could impact the premium, coverage amount and length of the policy you are offered. These factors range from age, gender and medical history to driving record, current hobbies and criminal history.
The different types of term life insurance
When it comes to taking out a term life insurance policy, there are numerous types to choose from. These varieties range from level term life insurance and annual renewable term life insurance to decreasing term life insurance and return of premium term life insurance.
Level term life insurance
As the name suggests, level term life insurance maintains the same premiums and death benefit for the duration of the coverage term. As such, rates won’t increase with the passage of time. Additionally, the death benefit will be the same whether death occurs in the first or last year of the policy.
Renewable term life insurance
Regardless of age or health, this variety of term life insurance ensures that the policy is renewable beyond the period of the original term. It’s worth noting however that premiums will increase each year that the policy is renewed.
Decreasing term life insurance
A decreasing term life insurance policy is characterised by coverage payout that decreases over the length of the policy. It’s worth noting however that fixed premiums will need to be paid every month.
Return of premium term life insurance
This variety of policy will attract a higher rate. However, the value lies in the fact that once the policy ends, any premiums paid over the entire lifetime of the policy will be reimbursed back to you in full.
The pros and cons
As with anything in life, there are pros and cons to term life insurance policies. As such, the advantages centre around the fact that term life insurance is traditionally cheaper than whole life insurance. Additionally, there is a certain sense of both peace of mind and flexibility.
In terms of cons, with a term life insurance policy, there is no cash value component. Further, if the policyholder were to outlive the coverage term, it’s essentially a sunk cost. Meanwhile, for sum, coverage for only a set period of time might not be an attractive proposition.
Picking a life insurance policy
There are some things in life that are just hard to talk about. However by avoiding these tricky discussions, we may be doing more harm than good in the long run. This is especially true if you were to pass away without life insurance.
While an incredibly personal choice, life insurance can help ease the financial burden on loved ones. Whether you pass away early or late in life, payouts from term and even whole life insurance can help to ensure that grief is not compounded with money troubles.