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What are the pros and cons of term life insurance policies?

Friday, January 13th, 2012

Term life insurance policies, which offer coverage for a stipulated period of time, have their own pros and cons. A lot of people take term life insurance in order to protect themselves from unforeseen events. For example, you may want to take a term life insurance for 20 years, if you are worried about the graduation of your children or if you believe that during that period you will be able to pay off the mortgage on your house. So, if something happens to you, during that time period, the death benefit from the insurance will take care of the liability to a great extent. Short term goals are therefore met with term life insurance. If you have a loan that can be paid off in 5 years then you can take term life so that you don’t burden your dependents with the loan in case of accidental death during that time frame.

A very important advantage of term life policies as opposed to whole life insurance is that they are relatively cheaper. This is because the risk involved for insurance providers is much less. There is usually no guaranteed payout and if the term is completed, you don’t stand to get any death benefits from the insurance company. In other words, while your premiums give you the cushion of investment in whole life insurance, they might not mean anything in case of term life insurance. This is one of its main disadvantages. However, it also leads to the cost effectiveness of term life insurance policies. In fact, a lot of people take term life insurance to guard against financial liabilities while using the spare amount, saved by not taking a more expensive permanent life insurance, to invest wisely for greater returns.

Term life insurance policies are more affordable, but the main benefit is the flexibility that they offer. Two important options available to you are renewable and convertible life insurance policies. In renewable policies, you can renew your term life insurance at the end of the term, whether it is annually or once in 5 years. The disadvantage is that while the death benefit remains constant after you renew, your premium will go up. Premiums can increase by a substantial amount with age. The good news is that you don’t have to go through a qualification process. Similarly, at an additional cost, you can convert your term life insurance into a different policy offered by the insurance provider.

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