Term Insurance is the longest standing type of life insurance. It is considered a temporary form of insurance as its not intended to be maintained for all of life. The reason a person might purchase a Term Insurance policy, for example, would be to cover a financial need such as a mortgage during their younger working years for a low insurance cost.
For a detailed history of Life Insurance please go here.
Term Structures and Renewals
Terms can be for 5, 10, 20, or 30 years, meaning life insurance will be in place for the elected term and then expire. There are many Term Insurance policies that will automatically renew the policy for another term as long as premiums continue to be paid. Terms to age 65, 75, 85, or 100 may also be available though do not get renewed.
It is important to know there is an overall expiry date for policies that automatically renew. According to the contract, once the insured person reaches the age of expiry, often age 65, 75, or 85, the policy will terminate regardless of where its at in the term. For example, if a 10-year term policy was renewed at age 60 and was set to expire at age 65, the policy will expire 5 years into the newest term.
While initially the cheapest form of insurance, premiums will increase every time the term is renewed. That is because the older the insured person gets the more likely they will be to die, and the costs rise accordingly. The difference between Term and Permanent Life Insurance costs is that Term Insurance only considers the cost of insurance for the years inside each individual term, where the earlier terms are cheaper, and the later terms are more costly. Permanent Life Insurance, in comparison, considers the cost of insurance for the lifetime of the insured person and averages the premiums over their elected pay period.
Alternatively, a term policy to age 65, 75, 85 or 100 will be more expensive than a 10-year term policy and more like that of permanent insurance, though is without the additional costs and benefits of the permanent policy.
Unfortunately, the increased premiums of Term Insurance often become too costly to maintain in later years, the time where its needed most, and between 96-98% of term insurance policies do not pay out. This is also because, where the term is to age, people are simply outliving their policies.
Of course, this is not a problem if the reason for purchasing the insurance policy is no longer there. For example, if the mortgage of the insured person is fully paid off. However, this is not always the case.
Life insurance can be a particularly useful and important tool for both retirement and estate planning purposes. There are often cases where those who have purchased a Term Insurance policy in younger years, decide that having a Permanent Life Insurance policy would be more beneficial to them in their later years than the Term Insurance policy.
There are many Term Insurance policies that offer the option to convert the policy to a Permanent policy, subject to conditions laid out in the contract. This option can help the insured person maintain insurance coverage as needed, especially in those later years.
Typically, the death benefit is level, meaning that if you were to purchase $500,000 of Term Insurance coverage, this is the amount that will be paid out. There are some policies that can be indexed to inflation, though this will come at an extra cost. There are also policies that can have a reduced death benefit and reduced cost, for example, if the insurance is tied to a mortgage that is being paid off. The death benefit of Term Insurance is paid out tax-free.
There is no Cash Value or investment component available with Term Insurance.
Different insurance companies offer different insurance riders. Riders are optional benefits you can add on to a basic insurance policy. While some insurance companies offer more riders and some less, here is a list of the basic riders available in Canada:
- Term Insurance
- Critical Illness Insurance
- Long Term Care or Terminal Illness
- Accidental Death and Dismemberment
- Death or Disability Waiver of Premiums
- Future Guaranteed Insurability
- Child Rider
- Spousal Rider
- Paid Up Additions
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