Define Term Life Insurance

Before the insurance industry invented whole life policies, all life insurance was in the form of term life insurance.  This is where an insurance company agrees to pay your beneficiary the agreed insured sum if (and only if) you die within the term of the insurance policy.  In return for this you pay an insurance premium on a monthly, yearly, or one-off basis.  If you don’t die during the term life insurance period then you will receive nothing.

This is in contrast to “whole life” or “whole of life” policies which will pay out the agreed sum (if the insurance premiums are payed) whenever you die, even if this is at 90 or a 100 years of age.

Advantages of Term Life Insurance

When compared with whole life insurance, the major advantage of term life insurance is the much lower premiums for the same insured amount. As the insurance company is effectively taking a bet on whether or not you will die within the insured period the premiums can be a lot less (sometimes 10% or less) of the whole life premium. This is because there is no need for the policy to have an investment element to pay out on your eventual death.

For people on a tight budget the cost of term life insurance premiums can be varied by opting for a shorter (cheaper) or longer (more expensive) term. In this way you can get the level of life insurance cover that you think you need within your budget.

Disadvantages of Term Life Insurance

If you don’t die you will receive nothing! This is the main reason why whole life insurance policies were invented, to give an investment return in addition to life cover.

Premiums will increase when your term ends. If at all possible you should arrange term life insurance for the whole time that you think you will need it (e.g. the period of time that you expect to have children in education). Also try to get the premiums fixed for the longest time possible. Otherwise you will face the problem that when you come to arrange a new term life insurance policy the premiums will increase based on your age.

Tags: Life Insurance, Term Life