Exploring the various types of term life insurance
Term life insurance is the most basic form of life insurance. With term life insurance, you pay for insurance coverage for a specified amount of time. When you die within the coverage period, the insurance will kick in to pay the death benefit.
There are no cash values built up, just pure protection (for the basic term life insurance policy). After the term is up, you can either allow it to lapse, renew it, extend it and in some cases, convert it into a whole life policy.
When the policy is renewed, you usually would have to pay a different premium (more expensive than the previous one). This is because the older you are, the higher risk you present.
But even with this no-frills policy, there still are some varieties that are designed to meet specific needs. Here, we will have a look at the different types of term insurance:
Level term
- How it works:
- The coverage amount remains the same throughout the life of the policy.
- Premiums also remain the same.
- Purpose of the product:
- To cover an interest-only mortgage (a mortgage whose principal throughout the duration of the mortgage)
- For those who don’t want changes in their premiums
- Disadvantages of this cover:
- Does not address the changing needs for protection (which may increase or decrease)
- Premiums remain the same even when the need for protection has decreased
- Does not take inflation into account
Decreasing term
- How it works:
- The coverage amount decreases, according to a pre-determined rate.
- The premiums may decrease or remain the same. If premiums are the same throughout the policy term, these are lower than the premiums for a level term insurance for the same initial coverage amount.
- Purpose of the product:
- To cover a repayment mortgage (a mortgage whose principal decreases as the mortgage is being paid off)
- Disadvantages of this cover:
- May not coincide with the actual mortgage amount so that the family will need to pay the balance (of the mortgage amount and the proceeds of the life insurance) off in the event that the person covered dies
Increasing term
- How it works:
- Coverage amount increases at a pre-determined rate or based on the current rate of inflation.
- Premiums will also increase.
- Purpose of the product:
- To provide temporary life cover but to also allow for inflation
- Disadvantages of this cover:
- Premiums are higher for this type of product
Renewable term
- How it works:
- This provides coverage for a specified number of years (usually 1 year or 5 years). After the policy term is finished, you have the option to renew the policy.
- Purpose of the product:
- Allows one to have cheaper term life insurance cover.
- Provides protection for a loan or asset you’re paying off with the option of renewing it without the need for presenting further medical evidence.
- Disadvantages of this cover:
- Premiums are lower at the onset but may be higher when the policy is renewed.
Convertible term
- How it works:
- This is issued out as a term life cover with the option to convert into a whole life cover (or another type of product) at a specified time. Read more about convertible term life insurance.
- Purpose of the product:
- This allows you to buy a more affordable term life policy and the convert it to a whole life cover at a time when you can afford to.
- There is no need to submit further medical evidence when you convert.
- Disadvantages of this cover:
- No cash values accrue while under the term life insurance cover
How does term life cover compare?
Updated on: 03.06.2013
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