What is Term Life Insurance?
Term Life Insurance provides life insurance cover for a specific period of time, called the policy term. Once the policy expires, the cover will cease and the insured will receive nothing. The sum assured of the policy is payable to the beneficiaries only if the life insured passes away during the policy term. That is why term insurance is also known as temporary insurance. There may be insurance buyers who may want to continue their insurance coverage beyond the length of the policy’s original term. That is the reason why insurers offer renewal and convertible options in their Term Insurance policies.
Types of Term Insurance
Term insurance can be divided into three main types, namely Level Term, Decreasing Term and Increasing Term.
Level Term Insurance
Level Term Insurance is the simplest and most straightforward type of life insurance policy. It is called a level term policy because both the death benefit and the premium remain level throughout the policy term. For instance, for a ten-year $100,000 level term insurance policy, the death benefit remains level at $100,000 over the entire course. Once the policy term ends, nothing is payable.
Decreasing Term Insurance
As the name implies, a decreasing term Insurance policy provides a diminishing amount of cover over the term of the policy. The death benefit begins at a certain amount and then gradually decreases over the term of coverage according to the stated method that is described in the policy. For example, the benefit of a five-year decreasing term Insurance policy may be $50,000 for the first year of coverage, decreasing by $10,000 on each policy anniversary, until it reaches $0 at the expiry of the fifth year.
Increasing Term Insurance
This type of term insurance is not common in Singapore. Its purpose is to protect the death benefit against the effect of inflation. As the name implies, an increasing term insurance policy provides a death benefit that starts from one amount and increases by some specified amount or percentage at stated intervals over the policy term. For example, the amount can increase by 5% per annum or 30% every three years. The premium also increases with each increase in sum assured.
Does it suit me? Term Life Insurance is suitable when either the need for protection is
- Purely temporary
- Permanent, but the insured temporarily cannot afford the premiums for permanent insurance
In the first case, term insurance is the complete answer, but it should be renewable in the event that the temporary need should extend beyond the period that was originally anticipated. Theoretically, the policy need not be convertible, but since the loss of insurability is a constant threat, it is advisable to obtain a policy with the conversion privilege. The second broad use of term insurance requires that the policy be convertible. The conversion privilege is the bridge that spans the gap between the need for permanent insurance and the financial ability to meet the need. In this case, since the insured’s financial situation might persist longer than anticipated, the policy should be renewable, as well as convertible.