Getting to know non-investment fixed term life policies
Non-investment fixed term life insurance policies – now that’s a mouthful! And what does it mean, anyway?
Simply put, it’s the no-frills type of term life insurance. You are covered for a certain period. If you die within that period, your beneficiaries get the insurance amount. If you die after the term has expired, no payments are forthcoming.
Strictly for Temporary Protection Purposes
Non-investment fixed term life policies are policies that are strictly for protection purposes. You see, there are times when insurance is packaged along with an investment vehicle where a portion of the premiums you pay go towards an investment component and the insurance company does the investing. However, for this article, we will focus on the kind of life insurance products that are affordable and provide coverage only for a specified amount of time.
Why Non-Investment?
Cheaper. Non-investment term life insurance products are cheaper. Since the insurance coverage is only for a specific number of hours and does not accumulate cash value, the premiums are higher as compared to cash value or permanent life insurance policies.
Simpler. These products are pretty straightforward – you know what your beneficiaries will receive in the event of your death. This is unlike some cash value policies, where the cash value income can be varied.
“Extra” funds can be invested. Although a term life insurance product is a non-investment product, if you can afford the premiums for a permanent life insurance policy, the difference in the savings can be invested and treated as earnings. Usually, the investment vehicles available can have higher return than what is provided by a cash value life insurance policy. This is called “buy term and invest the difference”.
Why Fixed-Term?
Fixed term life insurance covers you for a specific number of years and terminates the cover when the time (number of years) has passed.
Fixed-term policies are usually bought with a specific need in mind:
Income Provision. You can buy fixed term life insurance to ensure that your family maintains their lifestyle and has enough for their needs at a time when they are still depend on you for financial support. You can buy a 20 or 25-year term life insurance. After the 20 to 25 years, you won’t need much of insurance coverage; since your children are at a certain age, you can assume that they are already independent and self-supporting.
Mortgage protection. You can buy fixed term to protect a large loan such as a mortgage. Most lenders want to ensure that should you die before you have fully paid off the mortgage, the mortgage will still be paid in full. This prevents the threat of foreclosure for your family. (Read more about term life and mortgage life insurance)
Interim cover. If you are concerned for your loved ones’ financial stability when you die and the family loses your income, fixed-term life can provide cover when a whole life or a cash value policy is out of the question in your current budget. Then you can opt for a convertible term life insurance policy, (Read more about convertible term life policies) where you can convert to a permanent or cash value life policy when you are able to afford it.
Level and Decreasing Term Life Insurance
There are various types of non-investment fixed term life insurance policies:
- Level term. The amount of insurance coverage remains constant for the duration of the term. The premiums remain level as well.
- Decreasing term. The amount of insurance coverage decreases over time. The percent of decrease is provided to coincide with how the mortgage decreases as you pay it off.
- Increasing term. The amount of insurance coverage increases to account for inflation.
Updated on: 03.06.2013
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