What is Term Assurance?
Term assurance is a type of life insurance policy that covers the insured for a specific period, known as the term. If the policyholder dies during this term, a predetermined sum of money, called the death benefit, is paid out to the nominated beneficiaries. If the policyholder survives the term, the policy expires, and no benefit is paid.
Key Concepts
- Term Length: The duration for which the policy provides cover.
- Sum Assured: The amount paid out upon death during the term.
- Premiums: Regular payments made by the policyholder to keep the policy active. These are often fixed for the term.
- Beneficiary: The person(s) or entity designated to receive the death benefit.
Deep Dive into Term Assurance Types
There are several variations of term assurance:
- Level Term Assurance: The sum assured and premiums remain constant throughout the policy term. This is the most common type.
- Decreasing Term Assurance: The sum assured decreases over the policy term, typically used to cover debts like mortgages that reduce over time. Premiums are usually lower.
- Increasing Term Assurance: The sum assured increases over the term, often linked to inflation, while premiums may also rise.
- Renewable Term Assurance: Allows policy renewal at the end of the term, often without a medical examination, but at a higher premium based on age.
- Convertible Term Assurance: Offers the option to convert the policy into a whole-of-life or endowment policy without further medical underwriting.
Applications and Benefits
Term assurance is ideal for individuals who need financial protection for a specific period, such as:
- Young families needing to cover living expenses and future education costs if a parent passes away.
- Individuals with outstanding debts, like a mortgage, that they want to ensure are paid off.
- Business owners looking to protect their business from the loss of a key person.
Its primary benefit is its affordability compared to other life insurance types, making substantial cover accessible.
Challenges and Misconceptions
A common misconception is that term assurance is a waste of money if no claim is made. However, it provides invaluable peace of mind. Another challenge is ensuring the term length adequately matches future needs, as extending cover later can be costly.
FAQs
Q: What happens if I outlive the term?
A: The policy expires, and no payout is made. You would need to purchase a new policy if you want continued cover.
Q: Can I cancel my policy?
A: Yes, you can cancel, but you will not receive any premiums paid back unless the policy has a specific surrender value feature (rare for pure term assurance).