Inspiring Grip to Term Life Insurance
Our previous article on Life Insurance At Time When You Least Expect explored the synergy that the cost of living crisis has with life insurance and how it provides financial protection for your loved ones in unforeseen circumstances. 
Continuing our discussion on this vital topic, we will explore understanding term life insurance.
Life insurance is an essential financial tool that provides protection and peace of mind for individuals and their families. Among the various types of life insurance policies available, term life insurance is popular due to its simplicity and affordability. In this comprehensive guide, we will delve into the concept of term life insurance, its features, benefits, considerations, and how it compares to other types of life insurance.
Whether you are new to life insurance or seeking to understand the specifics of term life insurance, this article will provide you with the knowledge to make informed decisions about protecting your loved ones’ financial future.
What is term life insurance?
Term life insurance is a type of life insurance that provides cover for a specific period known as the term. This period can be chosen based on individual needs, ranging from as short as 1 year to as long as 50 years. When considering term life insurance, people often consider factors such as when their dependents may become financially independent or the remaining years on a mortgage.
There are two main types of term life insurance: decreasing cover and level cover. Here’s an overview of each type:
- Level Cover: You select the cover amount and policy duration with level cover. Throughout the policy term, you pay a fixed monthly premium. It’s important to note that this type of policy does not accumulate any cash value, and if you stop making premium payments, your cover will cease. In the event of a claim, a level cover policy provides a lump sum payment that can help your family maintain their standard of living. The funds can be used to cover monthly expenses like rent or mortgage payments. However, it’s worth noting that the cover amount remains fixed and does not increase with inflation.
- Decreasing Cover: In a decreasing cover policy, the value of the policy gradually decreases over the term until it reaches zero. However, your premiums remain the same throughout the policy duration. Typically, the cover amount in a decreasing cover policy is designed to align with the repayment schedule of a loan or mortgage. You can choose to cover only the amount and duration of the loan. The benefit of this type of policy is that if the policyholder passes away, the benefit amount may be sufficient to repay the mortgage or loan. As cover decreases over time, premiums for decreasing cover policies are often lower than those for a level or increasing term insurance. The payout from this policy can also be used to cover living expenses.
- Increasing term insurance: Increasing term insurance is a type of life insurance that provides coverage for a specified period, similar to other term life insurance policies. However, what sets it apart is that the coverage amount increases over time. This type of policy is designed to help mitigate the impact of inflation and rising living expenses. With increasing term insurance, the death benefit or coverage amount gradually rises at predetermined intervals, typically annually or every few years. This increase can be based on a fixed percentage or linked to a specific index, such as the Consumer Price Index. This gradual increase ensures that the policy’s cover keeps pace with inflation and maintains its value over time.
Key Features and Benefits of Term Life Insurance
- Affordability: Term life insurance is generally more affordable than permanent life insurance. Since it does not include a cash value component, premiums are lower, making it accessible to a broader range of individuals.
- Flexibility: Term life insurance allows policyholders to select a cover term that aligns with their specific needs. Common terms include 10, 15, 20, or 30 years. This flexibility makes it suitable for individuals with specific financial obligations or dependents to protect for a defined period.
- Death Benefit: The primary benefit of term life insurance is its death benefit to the beneficiaries upon the insured’s death during the policy term. This payout can be used to cover funeral expenses, outstanding debts, mortgage payments, college tuition, or any other financial obligations.
- Convertibility: Some term life insurance policies offer the option to convert to a permanent policy without needing a medical exam or evidence of insurability. This feature can be beneficial if the policyholder’s needs change or if they wish to maintain cover beyond the initial term.
Determining cover needs
When considering term life insurance, it is crucial to determine the appropriate cover amount and term duration. Several factors should be taken into account, including:
- Financial Obligations: Evaluate your outstanding debts, such as mortgages, car loans, student loans, and credit card debt. The cover amount should be sufficient to pay off these obligations in the event of your untimely death.
- Income Replacement: Consider the financial needs of your dependents, such as spouses, children, or elderly parents. The cover should replace your income to ensure they can maintain their standard of living and cover future expenses like education or healthcare.
- Future Expenses: Anticipate significant future expenses, such as college tuition for your children or a down payment on a home. The policy’s cover should account for these potential financial burdens.
- Existing Cover: If you already have life insurance through an employer or another policy, evaluate how much additional cover is needed to protect your loved ones adequately.
Term Life Insurance vs Permanent Life Insurance
It is essential to understand the differences between term life insurance and permanent life insurance to choose the right option for your needs. 
- Term Life Insurance: As mentioned earlier, term life insurance covers a specific term and does not accumulate cash value. It is suitable for individuals seeking affordable cover for a defined period, focusing primarily on providing a death benefit to beneficiaries. Term life insurance does not offer additional features such as savings.
For individuals with families, having decreasing cover can provide peace of mind, knowing that if something were to happen, their loved ones might be able to stay in the family home. Due to its alignment with the length of a mortgage, decreasing cover is often referred to as mortgage life insurance.
Choosing the right type of term life cover depends on individual circumstances and the specific assets or financial responsibilities you want to protect. Consider factors such as your mortgage, desire to support your family’s lifestyle in your absence, and other obligations when deciding on the appropriate cover.
