Understanding Term Life Insurance

What is term life insurance?

Term life insurance is a basic type of life insurance aimed to protect non-permanent financial obligations like mortgage loans, active income, business loans, post-secondary educational plans and other financial obligations that have end dates to them.

Why basic?

A term life insurance policy is a basic type of insurance policy in which it works more like an Autopac insurance coverage where you pay a premium for a certain amount of insurance coverage and you stay covered as long as you make your premiums.

There are no cash surrender values built up in a term life insurance policy and your premiums are expected to increase at every term renewal.

Term life insurance is simple and easy to understand as there are only two components which are:

  1. Insurance coverage, and
  2. Premiums

As I mentioned, there are no cash values built inside the policy, no dividends, paid-up additions or rate(s) of return in a term insurance policy unlike Whole life and Universal life which are a bit complex because of the extra bells and whistles that comes with permanent life insurance policies.

Term Life or Whole Life Insurance

When it comes to insurance planning, it isn’t really a battle between term life, whole life or Universal life insurance(s).

Generally, there are two types of life insurance policies:

Term life insurance(s) are classified into different terms which can come in the form of:

  1. 10-year term
  2. 20-year term
  3. 30-year term
  4. Up to Age 65
  5. Up to Age 80

Permanent life insurance(s), on the other hand, are further classified into:

  1. Whole Life Insurance
  2. Universal Life Insurance, and
  3. Term to 100 Life Insurance

Permanent life insurance is not better than term life insurance, nor is a term better than permanent.

Each has its own purpose.

Whole life, as permanent life insurance, aims to ensure our loved ones against financial needs or goals which arise upon our passing whenever it may be in our lifetime.

Examples of such permanent obligations are as follows:

  1. Funeral or Memorial Costs
  2. Taxes at Death (Income Tax Due to Deemed Disposition)
  3. Legacy or Inheritance
  4. Charitable Donation(s) at Death

Term life, on the other hand, ensures the life insured throughout the term of the policy.

Term life insurance, therefore, is perfect for protecting our loved ones from financial needs with end dates such as:

  1. Income Protection
  2. Mortgage Loan Obligations
  3. Personal or Business Loans
  4. Children’s Post Secondary Education

The best way to protect your loved ones is to protect them from both permanent and non-permanent obligations.

This way, you have everything covered.

Term life insurance will cover them against the financial risks of your non-permanent obligations like reduced or loss of income, home foreclosure, etc. in the event of an untimely passing.

Permanent insurance like whole life protects your loved ones from permanent financial needs like funeral costs, “taxes at death” and allows you to leave a tax-free legacy to your loved ones or a favorite charity when you pass away at old age.

Is Term Insurance A Good Idea?

If you have financial obligations or if you have loved ones who depend on you for financial support, implementing any life insurance is a good idea as it protects the financial well-being of your loved ones, business or organization.

As mentioned above, term insurance is perfect for protecting against one’s non-permanent financial obligations and at times, even one’s permanent obligations, at least temporarily; especially if you feel that permanent insurance coverage isn’t within your budget at the moment.

It is a good idea however to convert a part of your coverage into permanent life insurance as soon as possible because insurance premiums are more affordable the younger you are at the time of implementation.

The major difference between a term life insurance and permanent life insurance like whole life is that a term life insurance’s premiums are designed to increase at every renewal.

A whole life insurance premiums, on the other hand, will stay the same throughout your contribution period.

This is the reason why I suggest that you implement a permanent life insurance coverage while you’re young as it allows you to lock in a lower contribution amount that’s fixed throughout your contribution period.

But then again, your coverage doesn’t have to be 100% permanent as we can always structure a long term life insurance policy that protects your loved ones from both your non-permanent and permanent needs.

Such a policy can come in the form of both term and permanent insurance.

What happens If I Outlive My Term Life Insurance

Term life insurance, as its name, suggests covers the insured for a set term.

Outliving your term life insurance policy is the major risk of having only a term life insurance in place.

You technically have two options at the time your insurance policy’s term is up:

  1. You either renew it for another term, or
  2. You don’t renew and lose coverage

The tricky part at the end of a term life insurance’s term is that you’re going to be older which means that your premiums at the time of renewal will be based on your attained age which usually costs at least three times more than your initial premiums.

So what if you don’t renew?

The short answer is that you lose coverage not unless if you have a separate permanent life insurance coverage whose premiums don’t increase and will stay in place throughout your lifetime.

Another option is, of course, to apply for another life insurance coverage at the time your life insurance’s term ends however as you will be older by that time the costs may be prohibitive not to mention the possibility that one may no longer be as healthy as when you first implemented your term life insurance. Hence, there’s the risk of being declined coverage at an older age.

Can You Cash Out A Term Life Insurance Policy?

Cashing out a term life insurance policy is a valid concern.

There’s only one problem…

A term life insurance is a straight forward, basic type of life insurance that doesn’t have any cash surrender values so there’s really nothing to cash out!

As I mentioned above, a term life insurance policy works much like an AUTOPAC insurance that you have for your car, this is not, of course, to compare a person’s value to that of a car but then a term life insurance protects your loved one’s financial interest as long as your making the premiums.

No cash values are ever built inside the policy, you’re technically just paying for the life insurance protection.

Cheapest Term Life Insurance

The cheapest term life insurance you can implement is a 10-year term life insurance.

I say this with a caveat because a 10-year term life insurance can also easily be the most expensive life insurance if you have to renew it multiple times throughout your lifetime.

If starting with a pure term life insurance coverage, I would suggest that you implement at least a 20-year term life insurance and convert a portion of it into permanent life insurance as soon as your budget allows it so you will have some coverage left at the end of your term life coverage.

The purpose of a term life insurance is to cover the people you care about from your non-permanent obligations and having said this, it isn’t a good idea to renew your term as term insurances get more expensive at every renewal.


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