Term insurance – Death insurance

Term insurance – Death insurance as about 1% of all term life policies pay a claim. Either the insured doesn’t die or the policy lapses due to unpaid premiums. Insurance companies know this from their actuarial calculations when pricing them.

What is term life insurance? I found a definition on Wikipedia to help define term life insurance.

Term life insurance or term assurance is life insurance which provides coverage for a limited period of time, the relevant term. After that period, the insured can either drop the policy or pay annually increasing premiums to continue the coverage. If the insured dies during the term, the death benefit will be paid to the beneficiary. Term insurance is often the most inexpensive way to purchase a substantial death benefit on a coverage amount per premium rupee basis.

Let’s look deeper into some of these statements and see if we can gain a different perspective when we define term life insurance.

Coverage for a limited period of time

Once you sign that paper, the clock starts ticking. It’s a race between death and the day the policy ends and this why its’ called death insurance. If you live beyond the specified term, the policy expires without value. If the premium payments stop prematurely, the policy lapses and the insured is left with nothing.

But it’s a good thing if you don’t die early, right?

Increasing premiums

The cost of premiums is based on your health. As you get older, the premiums can increase because your risk of death increases. As this happens, it gets riskier for the insurance company. Many policies require that you present evidence of insurability at renewal to qualify for lower rates. They can deem that you are uninsurable and deny you coverage.

What often happens is that these policies terminate during the years when people need it (when they’re older). Then they find that it’s harder and more expensive to get coverage. This can drive them to not get coverage at all.

Paid to the beneficiary

Who’s the beneficiary on the policy? It’s not you. So, you can never take advantage of the death benefit (which is the only benefit). If you don’t die within the time-frame, no one gets anything. This is why our financial advisor calls it death insurance.

Do you find it ironic that it’s called a benefit but someone else only benefits when you die.

Often the most inexpensive

This is one of the biggest misconceptions out there. However, I can confidently say that this is the number one reason why people buy term insurance:

There are no living benefits. Cash value and the investment component are advantages of whole life insurance. Yet, people get enamored with this product because of its initial low price. It’s also the reason why people look down on whole life insurance policies.

So, is it really cheaper?

The premiums look cheap, especially in the beginning. But, the only time you get your greatest return on your money for this policy is if you die on your way home after purchasing the product. Each day you live longer, the policy gets more and more expensive each month. Because, again, the chances are slim that the policy will pay a claim.