Term Policy

From Financial Literacy Wiki

Term policy are the cheapest form of life insurance and appeal to families with limited budgets. A term policy provides life insurance protection for a specified period, ranging from 1 year to 65 years. Most term policies cover only death and total & permanent disability. There are some insurance companies that allow policy holders to add a rider to cover critical illness as well. A rider is a supplementary policy attached to a basic insurance policy that can be purchased with additional premium.

Term insurance is cheap because it is insurance in its purest form, no savings or investment features at all.. If death or permanent and total disability occurs during the term of the policy, the insurer pays sum assured to the policyholder or his beneficiary. No payment is made if the life assured survives during the term.

Level and Decreasing

Term policies can be classified into two types: level (straight) term and decreasing term.

In a level term policy, the sum assured is fixed throughout the term of the policy. In contrast, a decreasing term policy is one where the sum assured decreases over time until zero at maturity of the policy. Decreasing term policies are useful when the amount of protection you need declines over time. Examples of such situations would be assuring the life of young children, as they get older, they can take care of themselves thus need lesser protection.

Another type of decreasing term policy is mortgage reducing term insurance. Such a policy pays off an insured’s outstanding housing loan in the event that the insured dies or suffers from permanent & total disability.

Convertibility and Renew-ability

Term policy has two features: convertibility and renew-ability.

Convertibility allows the insured to convert his term policy into endowment or whole life policy before the policy matures. Renew-ability allows the insured to renew his term policy for another term without having to undergo a medical check-up. But take note, premiums still increased with age.

The advantage of term insurance is that the premiums are much lower than those of other types of life insurance. The disadvantage is that they have no cash surrender value since premiums paid to the policy are not returned if the insured survives the term.