What is Term Life Insurance?Term Life Insurance: What is it And is it Right for You?

There are several types of life insurance you can buy to make sure your family is secure if the worst happens.

In this guide, we’ll take a deeper look at one of the more popular forms of life insurance: term life insurance. We’ll cover who it’s for, when you need it, and how much cover you might want.

What is Term Life Insurance?

Term life insurance is probably what most people think of when they think of life cover. You’ve probably heard it called life insurance, life cover, or death cover. All of these phrases refer to the same form of life insurance: term life insurance.

Term life insurance means that your policy is in effect for a set period of time, usually renewable each year up to a certain age. Most policies have an expiration date—or an end to the term—but this is usually around your 100th birthday.

Term life insurance provides your beneficiary or beneficiaries with a lump-sum payment upon your death or terminal diagnosis.

You can choose the amount of coverage you want, and how much you want your beneficiaries to receive. This is called the ‘benefit amount,’ and greatly impacts how high your monthly premiums will be.

 

Why Do You Need Term Life Insurance?

If you’re in your 20s and have relatively low expenses, you probably don’t need term life cover. This type of cover is designed for people who have others depending on them for financial security.

Unexpected Deaths
About 18,000 registered deaths in Australia during 2013 were aged 20 to 60.
More than 40% of families experienced a surprise death.
64% of families had less than a week’s notice before the death of a spouse or parent.
1 in 10 parents had to find a second job after a spouse’s death.
33% of parents with no life insurance had to move due to financial pressure. Only 22% with insurance had to move for the same reason.
1 in 3 children over 14 had to take on a job within 2 years of a parent’s death.
67% of children took on more household responsibility.
49% of children had to care for their siblings.
67% of children took on more household responsibility.

Reference:
http://www.apexinsights.anz.com/content/dam/Apexinsights/Documents/impact-of-death-interactive-presentation.pdf

As you can see, unexpected family deaths can have a devastating effect on those the deceased leaves behind. Losing a primary figure in the household does more than emotional damage. It can leave the family financially vulnerable and struggling to stay above water.

Adults with children, a mortgage, and a stable source of income have a big financial responsibility in their household. If they weren’t in the picture, the rest of the family would likely have a hard time covering the bills, staying in school, and continuing to live a regular life.

 

What Does Term Life Insurance Help Cover?

The reason you might need term life insurance varies depending on your financial security, savings, debt, and a host of other factors. Term life insurance can help pay for many things, including:

  • Regular household bills and expenses
  • Mortgage or rent payments
  • University or private school tuition
  • Medical care for the rest of the family
  • The cost of a funeral

You can use term life insurance for anything, but these are some of the common ways that people use the benefit.

Nothing can fix the emotional toll that the loss of a parent or spouse can take on a family, but term life insurance can help with the financial side of things. Not having to worry about money can have a significant impact on a family’s emotional and mental health.

 

When is a Good Time to Buy?

Like we covered above, not everyone needs term life insurance. People who live alone with little responsibilities probably don’t have to worry about life insurance just yet, but everyone’s case is different.

You might want to consider life insurance if you’re having a child, getting married, buying a house, or have recently taken on more responsibility, like caring for a loved one with health issues.

We should note that life insurance premiums are largely based on your age. Those who buy life insurance at a young age—and keep it as they get older—may retain lower premiums over time than someone who waits until they’re 50 to buy life insurance.

That takes us into the premium model, which we’ll briefly discuss below.

Premium Model

Term life insurance premiums come in two forms: stepped and level. Stepped premiums get higher as your risk increases, which is usually in line with age. Level premiums, on the other hand, stay the same until you reach the cutoff age, which is typically around 65.

You might be wondering why someone would choose stepped premiums over level premiums.

The advantage of stepped premiums come earlier in the policy. Stepped premiums are much cheaper than level premiums in the beginning, so they’re attractive to those who want life insurance on a short-term basis.

You could be interested in buying a short-term policy with stepped premiums to make sure your family is covered for a few years. As your needs or financial situation changes, you can buy a better policy with level premiums and keep it for a longer period of time.

 

How Much Do You Need?

Your personal and financial situation determines how much life insurance you need. Ask yourself the following questions when considering life insurance:

Life Insurance Questions
How much debt do I have?
How much do I have in savings?
What do groceries and other expenses cost every month?
What are my mortgage or rent payments?
Do I make more than my partner?
What other expenses do I have?
Does anyone in my family need medical support?

As a general rule, you should buy at least enough life insurance to cover your debts if you pass. You don’t want your family to face extreme debt while also losing a primary breadwinner.

 

What Other Kinds of Insurance are Available?

Term life insurance isn’t the only kind of insurance you can buy to protect you and your family. Other common forms of insurance include:

  • TPD Insurance – Total and Permanent Disability Insurance provides you with a lump sum payment if you face a permanent disability that leaves you unable to work.
  • Trauma Insurance – Provides you with a lump sum payment if you suffer an injury or severe illness. This insurance does not relate to whether or not the condition is permanent or whether or not you can still work.
  • Income Protection Insurance – Provides you with ongoing payments to replace your income if an injury or illness forces you out of work for a significant time.

These policies can be purchased as standalone policies or in conjunction with each other. Prices and terms vary between insurers, so it’s always a good idea to shop around to find a good price on cover.


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