Term life insurance policy demystified

Term life insurance policy demystified

By Farai Francis Zhara

He came in the office and was visibly in a very jubilant mood. He tossed his policy document on the table and explained that in few months’ time his policy will mature and so wanted to make the claim well in time because he wanted that money early enough to buy air ticket for his son who was going to study abroad, another figure was intended to be invested in the preparation of the coming tobacco season and this much was to be used to settle hospital bills and other debtors mentioned.

But when I opened his policy document I nearly cried. It was a term policy! Only a few months were left for the client to outlive his policy term and will be entitled to no benefits. Not even refund of premiums paid! Nothing. How do you explain that he has to die within the remaining months if the company is to pay this expected payout? In his diary he had budgeted this money to the last cent. I explained about how term insurance works and Just imagine the pain and consequences.

Many times I have assisted clients who thought there were going to get the stated amount in the document at the end of the term only to be told that it is a term policy with no benefits at the end of the period. This is when I realized that some of the information considered to be basic in insurance is jargon to many. If lack of knowledge can drive someone to such situations then indeed it is dangerous.

Term life insurance is an agreement concerning a policyholder and an insurance company agreeing that if the insured person dies within the stated time period, the insurance company will pay the stated death benefit to the nominated beneficiary or beneficiaries.

As is with other policies, the costs of term policy differ with age of the proposer, amount to be insured, healthy of the proposer and other considerations. In developed countries the insurer may went on to factor in things like Nicotine and marijuana use, History of substance abuse, Driving record, hobbies and activities, Criminal history, etc. It is therefore wise to consult your insurer and get a personalized quotation.

The major distinction between term life insurance and whole life insurance is the cash value component and the length of the policy. Term life insurance does not build cash value and has a specified coverage length. Term life policy does not have a surrender value and it is generally cheaper than whole life and other policies. It is very possible that one can actually outlive policy and there would be no death benefit payout.

On the other hand, whole life insurance policy has a cash value component and lifelong coverage, as long as you pay the premiums for the required period. What this means is that you can take a 20 year policy and if you die after 30 years your beneficiaries will still be entitled to death benefit payout unlike under term insurance. Whole life policy is considerably more expensive than term life insurance.

When buying term life insurance, there are two main decisions to make: How long the term should be and how much life cover do you require?

It is difficulty (if not impossible) to realy come up with a figure to say a person must be covered up to this much because of lifestyle differences, differences in earnings and the reason for taking this policy.  On general terms, a good cover amount is essentially one that is enough to meet all obligations intended to be covered. If income replacement is the main reason for example, one must compute the estimated amount needed to sustain their standard of living for the time period intended.

On the issue of policy term period you must consider the span of the situation you want covered. For example, if you are buying term life to cover the years until your children are through college, and that is say in nineteen years, then you will have to take 20-year term policy.

You may also want to know as to What Happens When Term Life Insurance Ends. It expires at the end of the stated term, for example after 20 or 30 years from date of joining. One cannot cash out this policy at the end of the term. In other words term life insurance policies have no cash value. They are no refunds for premiums paid (unless if it is ‘return of premium term life insurance’). It works just like car insurance, if not involved in an accident during the insured period then that is that, no refund of money paid.

This is one of the reason why term life insurance is generally the cheapest life insurance policy. If you want a policy that builds cash value, consider other policies like whole life or endowment policy.

If still in need for life insurance cover at the end of the term, one can renew the policy but will likely pay a much higher premium. It is advisable to get costings for a new policy before paying the higher renewal rate. One can still get a better deal even though he might be older or probably less healthy.

The major advantage of term life insurance is that it gives beneficiaries financial flexibility. The proceeds can be used to payout for any monetary expenses, whether it is paying living expenses, school fees or hospital bills.

A death benefit is guaranteed to beneficiaries if life assured dies within the term. For example, if one buy a $10 000 policy with a 30-year term and die after 3 years, beneficiary receives the full payout.

If you decide that you no longer want your policy before reaching the end of the term you are allowed to cancel it at any time and stop making payments. It is encouraged that you officially notify the insurer of your decision. You can cancel at any time but remember there is no surrender value, not even refund of some of your premiums.

I always encourage policy holders that before ceasing a policy you must make sure that you truly no longer have the need for life insurance. If you cease a policy and life situations change later, you could regret not having kept the policy.

Farai Francis Zhara holds an MBA from the National University of Science and Technology and a BCom from Midlands State University. He is a certified client services practitioner with over a decade in the insurance sector. He writes in his personal capacity. [email protected]