Term Life Insurance
Lots of different life events can trigger a search into life insurance options. It could be a marriage or the decision to start having children. As the primary earner in your family, you will likely want to make sure that your spouse or dependents are protected and taken care of financially should something happen to you.
If you have recently started looking into different life insurance options, you might have heard about term or whole life policies. While they both offer a lump-sum payment called a ‘death benefit’ to your listed beneficiaries after the insured dies, the amounts and types of coverage vary. If there are no surviving beneficiaries, the money goes into your estate and goes through probate in accordance with local laws.
What is Term Life Insurance?
While permanent life insurance, sometimes called ‘whole life’ insurance, offers “better” protection, it’s not always the best choice for everyone.
Term life insurance is a great option for those who see the need for life insurance but are looking for a more affordable option. Term Life Insurance works just like Permanent Life Insurance except it is only effective for a specific period of time. For example, if you bought a 15 year term life insurance policy and it hasn’t paid out, it will expire at the end of those 15 years. At that point, you would have the option of renewing your coverage. But be warned, if you develop some kind of chronic medical condition in the meantime, you may not be able to qualify for further coverage.
However, even if you don’t qualify for further coverage, all is not lost. Many Term Life Insurance policies come with a Return of Premium option that you can purchase for an additional premium. If you choose this option, all of the premiums you paid to the insurance company will be returned to you should you outlive the policy term.
What types of Term Life Insurance are available?
There are term policies with a level benefit (the amount stays the same), some are decreasing term (the benefit decreases over time) and some are one year renewable policies. Your Trusted Union insurance broker can help you select the right coverage for your needs.
Is Term Life Insurance right for me?
Term insurance is a great option if you are looking for a life insurance policy that is more affordable or if you only need temporary protection. Perhaps you only need life insurance to ensure a 25 year mortgage gets paid off or are only looking for protection until your children finished school. In these cases, there is no need to commit yourself to a more expensive whole life policy.
Another situation where Term Life Insurance is worth considering is if you’re young and relatively healthy. If you’re young and maybe don’t earn a ton of money but want some life insurance protection, a term policy is a more affordable option. You can get protection at a cheaper rate and since you’re young, you are unlikely to develop a medical condition that causes you to be ineligible for future coverage when your term policy expires.
Most often, this type of insurance is used for debt payments (ie. to repay a mortgage if the primary earner becomes deceased), income replacement for surviving family members, or funding your children’s college tuition. Term insurance is a great choice if you need a large benefit at an affordable price.
If you have a spouse or family member that doesn’t contribute income, it could still be a good idea to get some term life insurance for them. Most policies will let you add an additional insured onto your policy giving them the same benefit amount you have.
How much insurance is enough?
Ideally, you’ll want to purchase enough life insurance to enable your family to maintain their quality of life without your income. If that is too expensive for you to reasonably afford at the time, you can consider purchasing enough insurance to tide your surviving dependents over for a few years with enough money left over for your spouse to train for a new career.
If you work with Trusted Union to secure Term Life Insurance, we will go through a comprehensive “needs analysis” with you that takes into consideration things like: current debt load, expected college tuition fees for your children, monthly living expenses, and income replacement for your surviving family members. This “needs analysis” exercise will generate the amount of insurance you should buy in ideal circumstances but there’s certainly no obligation for you to purchase that much insurance. It’s simply a guideline so you should purchase enough insurance as you can comfortable afford.
Keep in mind that this number will change as well over time as your debt load and income replacement needs decrease. For this reason, you should have your policy reviewed by a licensed and reputable broker and a needs analysis redone regularly.
When is the best time to buy a Term Life Insurance policy?
The best time to purchase a life insurance policy is usually when you’re prompted by a major life event like marriage or the birth of a child.
Another great time to purchase is while you’re still young. Purchasing life insurance while you’re still young leads to cheaper premiums and takes away some of the downside of a term policy because you’re more likely to be health and therefore eligible for renewal at the end of your policy term.
If you’re still confused or would like to learn more about which option is right for your specific situation, contact us.
Term Life Insurance FAQ
What is term life insurance and how does it work?
As you may already know, a life insurance policy is a policy that insures your life. If you were to die while the policy is in force, it pays a lump sum death benefit to your listed beneficiary(s).
Term life insurance is a form of life insurance that is only active for a fixed length of time (this length of time is commonly referred to as the “term” - hence the name “term life insurance”.
A typical term life insurance policy lasts anywhere between 10-25 years (in multiples of 5). If you die during the policy period, provided you’ve paid all of your premiums, a death benefit will be paid to your beneficiary(s).
If you were to outlive the term of the policy, then the policy just lapses and nothing happens. That said, many policies have the option to extend for another fixed length of time or to convert it into a whole life policy either mid-term or at expiry.
What is the difference between whole life insurance and term life insurance?
The main difference between the 2 is the length of time it covers you for. Under a whole life insurance policy, the policy is in force for your entire life provided premiums are paid on time (although many of them will expire once you turn 120 years old). A term life insurance policy only lasts for a fixed period of time. You choose this time period when you first purchase the policy.
Another difference is that whole life insurance policies come with a small investment component in the form of a “cash value”. Every time you pay premiums, a certain portion of it goes towards the “cash value” which then earns interest. With a term life insurance policy, you only get a fixed amount of death benefit.
What are the benefits of term life insurance?
A term life insurance policy has 3 main benefits: affordability, flexibility, and simplicity.
All things being equal, a term life insurance policy is much cheaper on a monthly basis than a whole life insurance policy. This is because there is an expiry date to the policy.
A term life insurance policy is also more flexible than a whole life policy. Since there’s a fixed term, you’re not locking yourself into paying monthly premiums for the rest of your life. And with different options like convertibility, accelerated death benefits or long term care benefits (all available with an extra charge), you always have the option to modify your policy at a later date. With all the add-ons attached, it can start to look very much like a whole life insurance policy.
Another often overlooked benefit of a term life insurance policy is its simplicity. With all of the bells and whistles stripped out, it’s a very easy policy for clients to understand: if you die during the policy term, the insurance company will pay whatever sum of money you’ve chosen to the beneficiary(s) you’ve chosen to include on your policy.
Is term insurance a good idea?
Yes, but it all depends on your reason for purchasing life insurance in the first place. If your reason for purchasing life insurance is for a specific goal that can be achieved over a fixed period of time (ie. pay off the mortgage or to protect your children until they become self-sufficient), then term life insurance is a good idea.
If your mortgage amortization period is for 25 years, then it makes sense to purchase a life insurance policy with a 25 year term. Similarly, if you want to make sure your children are protected until they become self-sufficient, you could purchase a term life insurance policy with a 20 year term.
Speak with a licensed Trusted Union life insurance broker in Hong Kong about your specific needs and we can put together a proposal for you.
Is term or whole life insurance better?
Unfortunately, as with most things in life, there is no one clear cut winner. There is no policy that is better than any other. It all depends on what your goals are.
If you just need insurance for a short period of time (ie. a mortgage or the birth of a child), then a term life insurance policy would be the “better” option.
If you value flexibility or want life insurance that is more affordable, term life insurance is a “better” option than whole life insurance.
But if you’re looking for an investment component or want to use life insurance to build and transfer wealth as part of a larger financial or estate planning strategy, then whole life insurance is “better”. A whole life insurance policy can accumulate a cash value that can be withdrawn or borrowed from while the insured is still living.
If you’re worried about insurability in the future or want to know that you’ll always have an insurance policy in force to protect your dependents, then a whole life insurance policy is “better”.
What happens to term life insurance at the end of the term?
Term life insurance policies only last for as long as the predetermined term. If the term is over and the insured has outlived it, the policy simply expires and disappears. You no longer need to pay premiums but your dependents also would not be able to receive a death benefit if you died.
Depending on the product and the insurance company you choose, you may be able to either extend the policy again for another fixed term of time or to convert it into a whole life insurance policy subject to medical screening.
What happens to term life insurance if you don't die?
Term life insurance is a type of life insurance policy that is only active for a fixed amount of time called a “term”. Usually the term can be 10, 15, 20, 25, or even 35 years. Once this term end, and the insured is still alive, the policy simply expires.
That said, depending on your policy, you may have the option to extend it for another fixed term or to convert it to a permanent life insurance policy. If you choose the conversion option, you may be required to fill out another medical questionnaire and undergo a medical exam to determine your eligibility.
What is one benefit of term life insurance over whole life?
The major benefit of term life insurance over whole life insurance is cost. All else being equal, a term life insurance policy will be more affordable than a whole life insurance policy.
Another major benefit is simplicity. It’s hard to sign up to something you don’t quite understand. Many clients are a lot more comfortable buying a term life insurance policy because it works in a very straightforward way: if the insured passes away during the policy term, the policy pays out a death benefit to the beneficiary(s) listed on the policy.
The final benefit is flexibility. A term life insurance policy, especially when layered together in a “laddering” strategy, can be used to make sure that you have exactly the amount of coverage you need at exactly the right time.
Does Term Life Insurance have cash value?
Term Life insurance is - all else being equal - the cheapest form of life insurance available. It’s also one of the most simple and easiest to understand. As a result, it only provides a straight death benefit paid upon the death of the insured while the policy is still active.
As a result, unlike whole life insurance, there is no cash value accumulated through the policy. On a predetermined date, the policy just expires provided no claim was made on the policy.
Should I convert my term life insurance to permanent?
This goes back to the previous question on which policy is the best. There is no best as it all depends on your own unique situation. If your goals are short term (ie. paying off a mortgage or making sure your children are protected until they become self-sufficient), then you should consider sticking with your term life insurance policy.
Now if your family situation changes and you’re looking to take care of multiple generations with your income or for financial and estate planning reasons, then you can consider converting your term life insurance policy to a permanent one.
Another reason to convert is if you have, or are worried about developing, a chronic or terminal illness. In that case, you don’t want to have to worry about passing away just after the policy expires leaving your family with nothing.
At what age does term life insurance go up?
Once you purchase a term life insurance policy, your premiums do nor change - let alone go up - as you age. Your natural aging was already factored into the cost of your policy by the insurance companies.
That said, the older you are when you purchase the policy, the more expensive it will be.
Can I sell my term life insurance policy for cash?
There are many reasons why someone would want to sell their life insurance policy. It can be a useful source of money for people facing financial hardships. Many people that need to pay for medical bills, long-term care, etc. will sell their term life insurance policy as a way to finance those expenses.
But not all term life insurance policies are sellable. It is only possible if your term life insurance policy can be converted into a permanent life insurance policy (look for the “conversion rider” in your term life insurance policy). And you can only sell it after you’ve converted it.
Once you’ve converted it, you’re able to negotiate a settlement with the buyer. The amount of settlement is based on your age, health, type of insurance, premiums, and the death benefit amount.
That said, just because you’re able to sell your policy, it doesn’t mean you should. If you need extra money to pay for medical bills and other expenses due to a terminal illness, check if your policy has an accelerated death benefit rider. This rider lets you receive your death benefit early in the event of a terminal illness.
If you’re looking to sell your policy to finance long-term care, you can check to see if your policy contains a long-term care rider. It works in much the same way as the accelerated death benefit rider.
Can I get money from my term life insurance policy?
No, unlike a whole life insurance policy, there is no cash value savings component that you can borrow from while you’re still alive. The only way to get money out of the policy is to sell it.
If you’re looking to get extra money from your term life insurance policy to finance medical bills or long-term care, you should look to see if your policy contains an accelerated death benefit (which provides you cash early if you are suffering from a terminal illness) or the long-term care benefit (which pays you your death benefit early if you need to pay for long-term care due to severe physical or cognitive impairment).
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