Pros And Cons Of Term Insurance
Term insurance, like any other product, has pros as well as cons. When purchasing an insurance policy, the person must look at several factors. Factors such as financial soundness of the insurance company, the quality of service and the type of products sold must be taken into consideration. When a person is buying term life insurance, the premium rates, additional benefits and provisions such as renewability and convertibility must be taken into consideration. The pros and cons of term insurance must be carefully analyzed before purchasing a term insurance policy.
Advantages Of Term Insurance
1. Relatively Inexpensive
Term life insurance has several pros. The first one is that it is relatively inexpensive when compared to permanent life insurance. This is the main reason why many people go in for term insurance. Young families wishing to save money as well as get protection against future contingencies find term insurance extremely attractive. Such families cannot pay the high premium rates needed to maintain a permanent life insurance policy. Term insurance is a viable alternative for them.
2. Renewability
Another advantage of term insurance policies is that they are renewable. Policy holders can renew their term insurance policies once they mature. There is no need for them to prove that they are still insurable at the time of renewal. They can renew their term policies without being subjected to medical examinations again.
3. Convertibility
Yet another important advantage of term life insurance policies is that they are convertible. Most term insurance policies have a provision which allows policy holders to convert their term insurance policies to permanent life insurance policies at their convenience. Families which are not able to afford permanent life insurance policies go in for term insurance policies. When their financial status improves, they can convert their term insurance policies to permanent life insurance policies or endowment policies, whichever suits their needs. This feature allows policy holders to convert their term insurance policies as and when they require, instead of having to pay high rates of premium from the date of purchase of the policy.
4. Term Insurance Meets Special Needs
One of the other important pros of term insurance policy is that term life insurance is a viable solution to temporary needs such as payment of mortgages, repayment of car loans and payment of college expenses for children. These needs are temporary and will disappear after a specific period of time. Term policy can help in meeting these needs.
There are two sides to a coin. If there are pros, there must be cons as well. Every product or service in the market has both pros as well as cons. This is the unwritten law for all products which are man-made. Term insurance policy is no exception to this rule. It has several pros, but it also has some cons. These cons must also be considered before purchasing a term insurance policy.
Disadvantage Of Term Insurance
1. Increase In Premium Rates
The first disadvantage is fallout from one of its advantages. As seen earlier, renewability is one of the pros of short term life insurance policies. Term insurance policies can be renewed for a further period of time when they mature. But when a policy holder renews his/her term policy for a further period of time, the premium he/she has to pay is increased. This increase is justified by insurance companies. They increase the premium rates when the term policy is renewed because the policy holder is much older than when the term policy was first issued. As the policy holder grows older, the risk of mortality is increased. That is why the policy holder has to pay an increased rate of premium to enjoy the coverage offered by term insurance. This is an acceptable reason for the increase in premium rates. But still, it is an added burden on the policy holder. That is why it is considered a disadvantage. One other disadvantage is that term insurance policies cannot be renewed once the policy holder attains the age of sixty or sixty-five.
2. Higher Premium For Convertibility Options
One of the other cons of term insurance is also fallout from one of its other pros. As we have already seen, convertibility of term insurance to permanent life insurance policy or endowment policy is a great advantage. But this benefit comes at a cost. Not all insurance companies offer the feature of convertibility along with their short term life insurance policies. The companies that offer this feature charge a higher rate of premium from the policy holders. The insurance companies say since they offer the facility to convert the term insurance policies to permanent life insurance policies or endowment policies, they have the right to charge a higher rate as premium. The companies are well within their rights to do so. But this is an added cost to the policy holders.
3. Age Matters
One of the other cons is that convertibility is subject to certain conditions. Many insurance companies do not allow their policy holders to convert their term policies to permanent life policies or endowment policies once they attain the age of seventy. Conversion is also not allowed in case of the term insurance policy being in force for a certain number of years. For instance, a person who has a term insurance policy for ten years and the policy has been in force for seven years, the policy holder is not allowed to convert the term policy to permanent life policy or endowment policy. This is a major drawback.
4. No Cumulative Cash Value
One of the other cons of term insurance policies is that term insurance policies do not accumulate cash value. The premiums paid are expended. When cash value is not accumulated, the returns from the term insurance policy may seem like a pittance when the policy matures. Inflation and other economic phenomena do not have any effect on the term insurance policies. When such changes are not reflected, it puts the policy holder at a disadvantage. Money value does not remain constant at all times. The value of money when the policy is purchased may be different from the money value when the policy matures. This could put the policy holder at a major disadvantage as the returns may not be much, owing to inflation and other economic factors.
As we can see, term insurance, just like every other product in the market, has both pros as well as cons. The old saying “No pain, no gain” applies here. Without the cons, the pros cannot be enjoyed. All man-made creations have both pros as well as cons. Yet we continue to use the products. We do not stop using them just because they have a few disadvantages. We concentrate on the pros and the cons are put in the back burner. We do not ignore the cons, but we do not brood over them either. It is the same with term insurance. Though it has a few drawbacks, the policy holders take solace in the fact that term life insurance policies have a lot of advantages as well. People nowadays do a lot of research before purchasing a short term life insurance policy. They try to find out policies which offer them maximum benefits. They make sure that the policies they select do not have a lot of drawbacks. When the benefits outweigh the costs, people do not fret over the drawbacks so much. They just concentrate on enjoying the benefits.