Life insurance is just life insurance, right? But if you’re asking “what is term life insurance?” then you’ve probably already worked out it’s more complicated than that. There are many different types of life insurance which can be confusing for those seeking a policy.
That’s why we wanted to clarify exactly what term life insurance is. Along with doing just that, we’ll compare it against other life insurance types and see why term life insurance may be right for you.
What Is Term Life Insurance?
Term life insurance covers you for a specific term of time, such as 10 years. You pay into the policy for those 10 years and once that term ends, your policy expires. If you die during the term, your beneficiaries will receive the lump sum. If you die after the term has ended, they won’t.
Of course, once the term ends you can then either extend your policy or switch to a permanent form of life insurance. The two key benefits of this type of policy are that it is both cheaper and simpler than other forms of life insurance.
Key Components of Term Life Insurance
There are three key components of term life insurance:
Term Length – The terms offered generally range from 5 to 30 years. You can choose an amount between these years to get coverage to fit your circumstances.
Coverage Amount – This is the lump sum paid to your beneficiaries. The higher the amount you choose, the higher the premium.
Premiums – The premiums for term life insurance are generally locked in and won’t change for the term of the policy.
Why Choose Term Life Insurance?
We touched on a couple of key reasons there, but why would someone choose this type of policy? Let’s take a look.
Affordability – As there is a chance the insurance company won’t have to pay out on the policy, they are usually much cheaper than permanent policies. This is especially true for young people.
Flexibility – You get flexibility in the term you want. This means you can get a policy that perfectly fits in with your circumstances.
Simplicity – You pay your premium, and the policy pays out if you die. It’s as simple as that. As we’ll talk about shortly, this isn’t the same with permanent policies.
Why You Shouldn’t Choose Term Life Insurance
While term life insurance can be fantastic for many people, it’s also important to talk about its downsides so you can have full clarity on the pros and cons.
Expiration – The obvious negative is that you may pay into a policy for many years without anything to show for it at the end. This obviously means you’re still alive, but many like the reassurance of a permanent policy.
Premium Increases – At the end of your policy term, your health status may have changed and you will be older. Due to this, your premiums for life insurance will become higher than what you’ve been used to paying.
No Cash Value – Permanent life insurance has a cash value that can build up over time. This can be a useful financial tool that can be withdrawn or borrowed against. It can also be used to cover your premiums for a time. Term life insurance doesn’t have this.
Less Comfort – We touched on it there but permanent policies give you more comfort. They become a part of your standard monthly expenses and you are reassured that whenever you die, whether it’s in 5 years or 50, you will be covered.
What is the Cash Value of Permanent Life Insurance?
By now, you probably have a good idea why you should or shouldn’t consider a permanent policy, but you may have more questions about the cash value element. Firstly, it’s important to note this is separate from the lump sum death benefit your loved one will receive. Regardless of the cash value, your beneficiaries will receive the death benefit.
This cash value is a savings component. In whole life insurance, the cash value grows at a guaranteed rate set by the insurer. In universal life policies, the cash value is linked to investments that can have higher returns but also higher risk.
As it builds, the cash value can be accessed via withdrawals or loans. There are financial implications for this, but it does give you flexibility. What happens to this cash value when you die can depend on the policy, but it is usually forfeited to the insurer.
Is Term Insurance Right for You?
There are a few reasons why term insurance may be better for your circumstances than a permanent policy. If you have a young family, then it’s likely to fit in with your budget as you can cover yourself for the worst without it being a large expense.
Many families have a situation with young kids where one partner works full-time while the other either looks after the children full-time or has a much lower income. In this scenario, protecting the breadwinner with life insurance is a prudent financial decision. You may want term insurance as your financial circumstances are likely to change in the future.
Term insurance is also fantastic for covering debts, especially a mortgage. For example, you could get a term policy to align with the term of the mortgage. Should something happen to the policyholder, the mortgage could be cleared and the surviving family placed in a secure financial position.
Of course, it could just simply be the case you can’t afford a permanent policy right now. It’s important to look at your circumstances and see which insurance type is better for you. Both have pros and cons, and you need to weigh these up.
Final Thoughts
What is term life insurance? It’s a simple policy that covers you for a specific term and pays out should the policyholder die during that term. It’s a crucial safety net and allows many people to provide security for the people they love.
Is term insurance right for you? Hopefully, with the above information, we’ve helped to give you clarity on that question. If you’re interested in a policy or have any further questions, give Buckler Insurance a call today and we’ll be more than happy to help.
