Term life insurance is one of the straightforward forms of protection. When you select a term life insurance, also termed as term insurance, you pay premiums on monthly, quarterly, half-yearly, or annual basis. The insurance company offers protection during the term of the life insurance to your family. The major benefits of term life insurance are:
- Offers substantial provision of funds during the loss of income of your family
- Covers short-term needs and debts
- Provides added insurance protection during your child raising years
- Presents long-term protection for paying off mortgages or paying for college education
Term life insurance is basically suitable to people who could not afford purchase permanent life insurance but need to protect their families from sudden loss of income or for those who require coverage only for a specific time period. All term life insurance policies offer guaranteed death benefits but they do not have cash value. The premiums increase at mutually accepted intervals like one year, five years, ten years, twenty years, etc.
Term life insurance is ideal when your family is growing, since you could avail this protection for a specific period of time and then use the amount spent on term insurance premium for other purposes. Term insurance could also be used to supplement permanent income when your financial responsibilities outpace your income. In such situations, term life insurance helps you in obtaining crucial benefit of death protection, without affecting your budget too much. You could also obtain term life insurance coverage with convertible feature. This feature allows you to convert the final policy value to another policy of comparable cash value. Thus, you would be able to get the required coverage for a specific period and convert it into permanent coverage in future. However, the convertible term insurance policy has certain time limits. If that time limit expires, you would be forced to reapply.
Still, term life insurance has its own drawbacks. It is not suitable to everyone or under all types of circumstances. The major disadvantages of term life insurance are
- If your family members should obtain the assured value of the term life insurance, you have to die before the expiry of the term, even though this could sound quite unpleasant. The death benefit is strictly during the pre-determined term. For example, if the term insurance ends on December 31 at midnight and you die at 12-01 hours on January 1, your family would not get anything under the policy. However, they would get the full assured amount if you die at 11-59 hours on December 31.
- The coverage would cease to exist when the term of the policy ends or if you default on premium payments.
- Premiums increase at regular pre-determined intervals in term insurance and this could prove costly if your policy is long-term. If you purchase a term insurance policy at the age of 25 for 40 years, you might find out that your premium payments when you reach the age of 55 are beyond your budget.
Hence, it is advisable to buy a term life insurance for periods up to 20 years with convertible feature and convert it to permanent life insurance at that time.
