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- Term Insurance
Term Insurance
Term life insurance can be considered as the main arm of the life insurance portfolio. In contrast to whole life insurance, term life insurance policies have a finite life span and claims are only paid out if the policyholder dies within the term of the policy. Such insurance products are designed to offer customers cheaper premiums (because the cover period is shorter and the possibility of paying out is not guaranteed), while also offering greater flexibility.
For example, term insurance can be taken out for an 18-year period to cover the potential costs for the juvenile years of an offspring. Another advantage of a term insurance policy is that it can provide coverage for customers in their younger years, when health risks are lower and therefore premiums are lower. For example, customers can take out plans to cover them until they reach 50 and, because the plan does not cover the customer's later years, it will be relatively cheaper. At the end of that particular term plan, the customer can then renew or seek a fresh term life insurance deal.
Flexibility is also available in terms of the number of people named on a single policy. Policies can be taken out in an individual's name or jointly, with, for example, two parents being named on one life insurance policy that will pay out on either of their deaths. Joint life insurance policies are usually cheaper and easier to manage.
As term insurance does not commit the insurer to a guaranteed pay out, payment options are not only cheaper but more flexible. Most term life insurance companies offer premiums that are fixed for the duration of the policy, providing customers with a consistent regular payment to budget for. However, fixed premium policies understandably only offer fixed value pay outs, which do not increase to take into account inflation. While this scenario offers the cheapest premiums (without declining policy value) it is likely that the eventual lump sum payment on the death of the policyholder will be worth less at that time then it would have been when the policy was first taken out.
In order to ensure pay outs keep pace with inflation, life insurers also offer increasing term insurance. These policies provide a constantly increasing value from year to year, in exchange for increasing premiums year to year. The disadvantage for increasing term insurance compared to level term insurance is the extra cost of the premiums, but the advantage is a more valuable ultimate pay out.
In addition to level term and increasing term life insurance, companies also offer decreasing term policies. Such products offer reduced pay outs over time and, as one would expect, premiums reflect the level of exposure to the insurance company. Decreasing term insurance is usually used to cover the cost of a decreasing financial burden, such as a loan.
When taking out cover, term life insurance providers will request that the customer completes a medical questionnaire. This is to allow the insurer to assess the level of risk and to then set the premium level.