What Is Term Life Insurance?

One of the most common misconceptions about life insurance is that all products are the same. I often meet with clients who want the least expensive product (term 10), but don’t realize what happens to their coverage and premium long term. As a result, I usually spend time with most clients going over the difference between term life insurance and permanent life insurance. This article will focus on term insurance. I hope to go over permanent life insurance in a future article.

In a nutshell, term life insurance is temporary life insurance. It is very important to understand this. Term life insurance does not give coverage to you for your entire life, but only for a certain period of time. Furthermore, the premium for a term life policy increase over time as well.

There are also different ‘terms’ that a term policy can have. For instance, 10, 15, 20, 25, and 30 years are all lengths of terms that different insurance companies offer where the premiums stay the same for the period of time.

Let me go over a couple of examples to illustrate this. Suppose a healthy 50-year-old male is approved by Manulife for $250,000 of term 10 coverage. His premium would then be $41.42 per month. However, that rate is only good for 10 years! After 10 years, the premium increases to $110.47 per month for the 11^th year, $126.03 for 12^th year and so forth. So this means that even though he still has coverage, he is paying much more for the coverage in year 11 and beyond.

However, even if this healthy male kept on paying the increased premium every year, at age 80, the coverage goes away. Term life insurance coverage has an expiry age. For many companies that is 80, others it is 75 or 85. In other words, if you live past that age, your beneficiaries will get nothing from your policy because you can only have coverage to that expiry age! This is really important to understand. Term insurance is temporary in price as well as coverage.

So, this begs the question, why get term life insurance at all? Well, there are a few reasons to get coverage:

1. Term insurance is less expensive than permanent life insurance during the initial time period. When budget is a primary concern, term life insurance can make sense at least during the first term.
2. Term insurance makes sense for ‘short’ term or temporary situations such as coverage for a mortgage or dependent children. Having life insurance to pay off your mortgage is a good idea. However, eventually the mortgage will be paid off, and you wouldn’t necessarily need that coverage anymore. Therefore, getting a term-25 life insurance policy might be a good life insurance policy to get if you have a mortgage because mortgages typically are amortized over a 25 year time period.

So, term life insurance can be a very good product to get, is inexpensive in the short term, but increases in cost eventually and coverage will eventually go away. Hopefully this helps explain some things about term life insurance. But if you ever have any questions about something I did not get to in this article, feel free to give me a ring (1-613-408-7002) or send me an email (chris@farinsurance.ca).