What does term insurance mean?
[social_share]Term insurance is a type of life insurance used by people who want their life to be covered over a certain period of time, or term. It tends to be the cheapest type of life insurance and is the most similar to what’s called “classic insurance,” meaning the insurance provider will pay out if the policy holder dies during the term that is covered.
The alternative to term life insurance is universal or whole life insurance. This is less of an insurance product (although there are payouts if the insured person dies) and more of an investment product. It is not commonly offered in Australia, although in other parts of the English-speaking world it is far more common.
The term of the life insurance policy can be quite important to the premiums paid. This is particularly the case if the policy holder is in middle age. If this person insures his or her life for a reasonably long period, they may find that their premiums rise, whereas with most other financial products the price paid – particularly the monthly price – will fall when the term lengthens. For example, one of the easiest ways to cut the monthly cost of a mortgage is to lengthen its term.
With life insurance, however, it is different. This is because the insurance company is not simply insuring the policy holder at the start of the policy, but also at the end of the term. If a person in good health at forty years of age takes out a twenty-year term life insurance policy, that person is not simply being insured at forty, when there is a very low chance of dying if they are in good health, but also at sixty, when the chance of dying may not be astronomically high but is still higher than at forty.
As life insurance premiums tend to be the same amount throughout the life of the term, the person is not really paying the premium for the next month, but paying a tiny proportion of their premiums for the whole of the term. Thus they will be paying a fraction of the first month, a fraction of the last month, and a fraction of every month in between. This can mean that the insurance policy, towards the end of the term, can be worth quite a lot to the policy holder and to the insurance company, which may be willing to pay the person to surrender the policy.
