Term Life Insurance: Paid Up Or Not?

Term life insurance is a type of insurance policy that provides coverage for a specific period, typically between 10 and 30 years. It is a simple and pure form of life insurance where the policyholder pays a premium for a set term, and if they die during that time, a death benefit is paid to their beneficiaries. Term life insurance is generally more cost-effective than permanent whole life insurance policies, but it does not accumulate cash value and has no payout if the policy expires before the policyholder's death. This article will explore the topic of term life insurance, including its features, benefits, and differences from other types of life insurance.

Term life insurance vs. whole life insurance

Term life insurance and whole life insurance are two types of life insurance policies with distinct features that cater to different needs. Here is a detailed comparison between the two to help you understand their pros and cons:

Term Life Insurance:

• Policy Length: Term life insurance provides coverage for a specific period, typically ranging from 10 to 30 years. You can choose the term length that suits your needs.
• Cost: Term life insurance is generally the most affordable option among life insurance policies. The premiums are lower because the coverage is temporary and does not build cash value.
• Flexibility: Term life insurance offers flexibility in terms of coverage amount and term length. You can customise the policy to match your financial obligations, such as covering your children's expenses until they become financially independent.
• Payout: If the policyholder passes away during the specified term, the beneficiaries will receive the death benefit payout. The payout amount remains the same throughout the term.
• Renewal: You can renew a term life insurance policy at the end of the term, but the premiums will be recalculated based on the policyholder's age at the time of renewal.
• No Cash Value: Term life insurance does not accumulate cash value over time. It solely provides a death benefit with no investment or savings component.
• Suitability: Term life insurance is ideal for individuals who want substantial coverage at a low cost. It is often chosen by young families as it offers affordable premiums and the flexibility to cover their dependents' expenses.

Whole Life Insurance:

• Policy Length: Whole life insurance provides coverage for the entirety of the policyholder's life, as long as premiums are paid. It offers lifetime coverage, typically expiring at a specific age, such as 95 or 100.
• Cost: Whole life insurance is significantly more expensive than term life insurance due to its lifelong coverage and cash value component. The premiums remain level throughout the policy.
• Cash Value: Whole life insurance has an investment component that accumulates cash value over time. This value grows at a guaranteed rate set by the insurer, and you can borrow against it or surrender the policy for cash.
• Payout: Whole life insurance guarantees a death benefit payout to the beneficiaries regardless of when the policyholder passes away. However, any outstanding loans or withdrawals against the policy's cash value will be deducted from the final death benefit.
• Suitability: Whole life insurance is suitable for individuals who want lifelong coverage and desire a policy that builds guaranteed cash value. It is often chosen for end-of-life planning, covering funeral expenses, or leaving an inheritance for children.

Key Differences:

When deciding between term life insurance and whole life insurance, consider the following key differences:

• Cost: Term life insurance is generally cheaper, while whole life insurance has higher premiums due to its lifelong coverage and cash value component.
• Coverage Length: Term life insurance covers a specific period, typically 10 to 30 years, while whole life insurance provides coverage for the entire life of the policyholder.
• Cash Value: Term life insurance does not accumulate cash value, whereas whole life insurance allows you to build cash value that can be borrowed against or surrendered for cash.
• Complexity: Term life insurance is simpler and more straightforward, while whole life insurance is more complex due to the changing death benefit amount if there are outstanding loans against the policy's cash value.

Level term insurance

One of the main advantages of level term insurance is its predictability. Policyholders know exactly how much money their beneficiaries will receive, allowing them to make long-term plans. It can also be more affordable in the long run, especially for young and healthy individuals, as they can lock in a lower rate for a longer period.

However, one drawback is that the premiums are linked to the policyholder's health. If a person improves their health over the years, they may still be paying a higher rate for the entire term. In such cases, an annually renewable policy for a shorter period may be more suitable, after which they can reapply for a level term policy at a potentially lower rate.

Renewable term insurance

Renewable term life insurance is especially useful for those who want to renew a policy once the term is up, assuming their life circumstances don't change drastically, such as their health deteriorating, which would make them uninsurable. It provides peace of mind for the possibility of a worst-case scenario.

An annual renewable term (ART) life insurance policy, for example, offers guaranteed insurability for a set number of years and a level death benefit. The policy's premiums are reassessed annually, and the policyholder is likely to pay more as they grow older. ART policies are ideal for someone who needs short-term life insurance fast.

Renewable term life insurance is different from convertible term life insurance. While the former allows you to extend your current coverage, the latter allows you to convert term life coverage to whole life coverage at any point during the term or before your 70th birthday.

Simplified issue insurance

Simplified issue term life insurance is a type of term life insurance policy that is easier to apply for and obtain than a standard term life insurance policy. It is designed for individuals who are in good health and need coverage quickly or want to skip the medical exam usually required for life insurance.

With simplified issue life insurance, there is no medical exam. Instead, applicants fill out a questionnaire to provide health-related information and other personal details such as their name, age, height, weight, and address. The approval process is faster, and coverage can begin minutes after completing the application and making the first policy payment.

However, the simplified approval process means that the insurer takes on more risk, so the policy may be more expensive, have a smaller coverage amount, and a shorter term. The coverage amount is often capped at $40,000 to $50,000. Additionally, applicants are not guaranteed approval and may still be denied if they have certain medical issues or engage in high-risk activities or hobbies.

Simplified issue life insurance is a good option for individuals who do not want to undergo a medical exam, need coverage quickly, or are in poor health and believe they will not qualify for a reasonable premium with a traditional underwriting process. It offers the benefit of a quick approval process and immediate coverage, but at the cost of higher premiums.

Convertible term insurance

Convertible term life insurance is a type of temporary term life insurance that can be turned into permanent life insurance. It gives you the option to buy low-cost temporary coverage now while keeping your options open to buy lifelong coverage later.

A convertible term life insurance policy allows you to obtain less expensive term coverage with the option to convert it to a permanent policy at a later date with the same death benefit. This can be a valuable alternative if your insurance needs, financial resources, or medical situation change in the future.

Most convertible insurance policies allow policyholders to convert the policy for a predetermined number of years (e.g. 10 or 20 years). The conversion option may be part of the basic insurance contract, or it might be available by purchasing a special rider and attaching it to your policy.

The biggest benefit of convertible insurance policies is that policyholders don't have to undergo medical underwriting again to switch to a permanent plan. When you convert, the insurer cannot increase the cost based on your health status. You receive the same health rating as when you first signed up for coverage, even if you develop health problems later.

Convertible term life insurance is a good idea if you have long-term dependents, such as aging parents or a child with a disability, or if you have several large debts that you don't expect to pay off before your initial term expires. It can also be a good option if you don't want to risk being disqualified from coverage later in life due to age or health issues.

The main drawback of convertible term life insurance is that it may be more expensive than ordinary term coverage. Additionally, the cost of converting to a permanent policy will be higher than if you had bought the permanent policy initially.

Frequently asked questions