Term Insurance
General Introduction
Term insurance is a form of life insurance. It provides coverage for the policy holder for a specified period of time. For instance, if a person purchases a term insurance policy for a period of ten years, the coverage will be for ten years only. This is in contrast to forms of permanent life insurance such as whole life insurance or variable life insurance, where the policy extends for a longer period of time or throughout a person’s lifetime from the date of issue. The death benefits are paid on the death of the policy holder or when the policy matures, if the permanent life insurance policy is kept up to date. The benefits from whole life policy are paid when the policy holder dies. The benefits from the other forms of permanent life insurance policies, such as variable life insurance policies, endowment policies and universal life insurance policies are paid to the policy holders when the policies mature or when the policy holders die.
Once the term insurance policy matures, the policy holder can renew the policy and continue the coverage by paying a premium which will increase annually or close the policy and get the benefit amount. If the policy holder dies during the term of the policy, his/her beneficiary will receive the death benefits. Beneficiaries may be surviving spouse, children, parents or siblings. Term insurance is the most inexpensive form of life insurance in Canada.
Term insurance is considered to be the purest form of insurance. It provides pure insurance coverage. It does not build cash values. Term insurance is unlike other forms of life insurance such as permanent life insurance or variable life insurance, which build cash value. The rates of premium for term insurance policies are comparatively lower than that of whole life insurance policies, variable life insurance policies and universal life insurance policies. In these forms of permanent life insurance policies, the premium rates are much higher. Not everyone can afford to purchase a permanent insurance policy. But term insurance is affordable by even young people who have just started working.
Term Insurance Similar To Other Insurance Policies
Term insurance works like any other form of insurance. Policy holders can claim insurance only against what is insured. The insurance company will satisfy the claim only if the premium payments are up to date. If the term insurance policy has expired, the insurance company will not pay the policy holder. If the policy holder decides to discontinue the term insurance policy for some reason, the insurance company will not refund the amount of premium paid till date. Term policy works like auto insurance. If the owner of the automobile sells the automobile which has been insured and discontinues the auto insurance policy, the premium amount will not be refunded.
Primary Use Of Term Insurance
The main use of term insurance policy is to provide death benefit to the dependents. The policy holder may be the primary source of income in the family. In such cases, the death of the policy holder may disrupt the lives of the dependents of the policy holder. The surviving spouse and children may suffer. In such cases, the death benefits from term insurance could prove to be a blessing for the dependents. The money can be used to pay for the college education of the policy holder’s children, pay off mortgages, clear other debts and to cover funeral costs. The money from term insurance policies can also be used to cover any medical expenses which may arise. It can also be used to pay for investments.
Types Of Term Insurance
Level Term Life Insurance
The most common form of term insurance is level term life insurance. In this form, the premium rates are level throughout the term of the policy. Since term insurance policies do not build cash values, the premium rates do not increase due to inflation and other economic changes. When the term insurance policies mature, the policy holders can either close the policy and get the benefits or renew the policies for a further period of time. When a Canadian policy holder chooses to renew his/her term insurance policy, he/she has to pay an increased rate as premium. Premium rates are increased at the time of renewal due to the fact that the policy holder is older than he/she was when the term insurance policy was first issued. As the policy holder advances in age, the risk of mortality is much higher. That is why the policy holder has to pay an increased rate of premium in order to enjoy the coverage. The policy holder need not prove his/her insurability at the time of renewal.
Another form of term insurance is a policy which covers a period of one year. This sounds very simple on paper, but some complications are involved. A Canadian can purchase a term insurance policy for one year. If he/she dies within the one year period, the insurance company will pay the death benefits. But if the policy holder dies one day after the term of the policy is completed, the insurance company will not pay the benefits and the amount paid as premium will not be refunded. If the policy holder wishes to renew the policy after the completion of the one year term, he/she will have to prove that he/she is still insurable. This could lead to a lot of problems in some cases. For instance, if the policy holder becomes terminally ill during the one year term but does not die during that period and wishes to renew the policy at the end of the one year term, he/she will have to prove insurability. He/she would not pass the medical examination and prove to be uninsurable. The policy holder will not be able to renew the term policy and will not be able to purchase a new one. The premium amount will not be refunded as well. So, one year term policies are pretty complicated and risky.
A variation on the one year term policy is the Annual Renewable Term (ART) policy. In this type of term insurance policy, premium is paid for one year. The policy has a guarantee of renewal for a particular number of years. This period can be between ten years and thirty years. The policy has to be renewed each year. The policy holder need not prove insurability during renewal. The rate of premium increases with each renewal. As the policy holder ages, the premium rates also increase. Since renewing the term insurance policy each year is a little inconvenient, this form of term insurance and the one year policies are rarely purchased.
Convertibility Options
Some term insurance policies offer the option of convertibility. People who purchase a term insurance policy because it is relatively cheaper than permanent life insurance, can convert their term insurance policies to permanent life insurance policies when they are able to afford the higher rates of premium involved in permanent life insurance policies.
Insurance companies in Canada use the same mortality tables to calculate the cost of insurance and death benefits for both term insurance policies as well as permanent life insurance policies. But the rates of premium are very different. The reason for this is term policies often expire, while permanent life insurance policies have to pay out sometime or other. That is why permanent life insurance policies build on cash values, which make them more expensive than term insurance policies.