An overview of term life insurance
Term life insurance is the most common type of policy. It provides a tax-free death benefit at fixed payments against the death of the policyholder during a specified term. The term is maximum 30 years and term life insurance typically provides guaranteed coverage to people between 60 and 75. Term life insurance is also referred to as level premium insurance because the cost of premium is fixed for the set term.
In fact, term life insurance requires you to pay an annual premium against the benefit of providing financial protection for your dependents if you pass away within the term of the policy. You may pay £230 annually for a 30-year term policy to provide your loved ones with a death benefit of £250,000 should you pass away within the 30 years. Yet, if you don’t pass away when your term policy expires, your beneficiaries are not entitled to collect the death benefit.
Term policies are usually purchased to guarantee financial protection to the beneficiaries; cover short-term needs; help pay off mortgages; fund children’s college education or have extra money during their children’s raising years. Term policies are guaranteed to be renewable even if the policyholder is in poor health or would not be otherwise eligible to receive it. However, renewals can be quite expensive so it’s better to consider term policies to cover for short-term needs like 20 years or less. This will allow you to have better control of your finances as you get older and your financial obligations increase.
Premiums are calculated taking into account factors such as age, health condition, family history, gender and lifestyle. This generally applies in all types of insurance, but in term policies is more important because the coverage is provided for a specified period of time at a lower premium. Therefore, a individual in his 30s who doesn’t smoke and works at an office will pay a lower premium than an individual in his 40s who smokes and works as a fire fighter. Moreover, as women live longer than men, they pay lower premiums.
Although term life insurance is quite affordable, you may reconsider your policy limits. Reassessing your term policy may be based on particular life events, including health condition changes, income changes, family situation changes, retirement, and policy renewal. For instance, if you face a sudden change in your health you may want to increase your policy limits or choose a different insurance mix. Getting a raise at work may lead you to consider increasing your coverage and apply “the rule of ten” in your policy. This means insuring yourself and your family for ten times your annual income. If you get a divorce, get married or have a child you may consider decreasing or increasing your term policy coverage. Every serious life-changing event will potentially lead you to reconsider your policy limits in order to ensure the best possible coverage for yourself and your dependents at the lowest premium. Especially, if you’re approaching the renewable age it makes financial sense to explore your options.
The biggest advantage of a term insurance policy is that it is the most affordable of all types of insurance policies. This allows you to purchase higher amounts of coverage at the lowest premium. On the other hand, when you reach the renewable term your premium increases. This happens because you grow older and therefore the possibility of passing away increases thus increasing the risk that your insurance company undertakes to provide you with coverage. Therefore, it makes financial sense to buy term life insurance at an earlier age in order to have time to build equity and draw money for your liquid assets when you need to cover for an unforeseen event. Given that life term insurance doesn’t not build any cash value to borrow against, you should consider purchasing a term policy in your 30s.
Thomas Sterlin is a freelance author, specialized in the finance domain, who writes articles aiming to provide consumers with better overview of the features that insurance plans have. Read his latest articles on Aviva life insurance and Ageas life insurance offerings.