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Term Life Insurance
The simplest and earliest form of
insurance is term life insurance. This is insurance for a
particular term or time, often a year. It is in total
contrast to other life insurances like permanent life
insurance, whole life insurance, etc. Besides, absence of
cash value makes term life insurance a pure form of
insurance. As the name suggests, this insurance expires at
the end of the relevant term. If insured dies during
specified term, beneficiary receives death benefits. This is
a temporary insurance, as it does not offer coverage for
whole life or any permanent insurance coverage option.
Usually, insured does not die within specific term or rather
term expires before insured. Therefore, insurer or insurance
company does not have to pay out compensation benefits.
Hence, administrative and other associated costs for term
life insurance is less as premium costs of such insurance
are also very low.
Basis of Term Life Insurance
There are various concepts supporting
working of term life insurance. Theory of decreasing
responsibility helps you assume that all your financial
responsibilities are temporary and you need insurance to
offset these responsibilities temporarily. You are therefore
in need of a temporary insurance only. Again, this concept
widens its horizons. As you need insurance for temporary
period, then why should you invest large sums or pay hefty
premiums for long period or many years. Instead, you can buy
such temporary insurance and invest that extra money which
you would pay if it were permanent insurance. Such
investments can help you meet any calamities and expenses.
The main attraction of term life insurance is its annual
renewable option. Normally, such insurance is for a single
year. Your beneficiary receives death benefit if you die
within the term but receives nil benefit if you expire even
a day after your term ends. Your premium is therefore only
the cost of such vague probability of you dying within the
term. Of course, additional costs like profit and other
similar costs also make a part of premium costs.
The main point in favor of insurer is that the probability
of your death within a year is very remote; therefore,
insurer offers low premiums. However, it is not very viable
from your angle. Therefore, you can purchase annual
renewable term of term life insurance. In this case, you pay
premiums applicable for single year of coverage but have the
guarantee of continued coverage for a longer period like ten
years, twenty years, etc. Such renewal coverage premiums are
slightly higher than simple single term insurance.
Another popular form of term life insurance is level term
insurance. Here you pay same premiums for long periods like
ten, fifteen, twenty, thirty years. As you pay same premiums
every year, you gain through averaging of annual renewable
term insurance. Longer terms mean higher premiums.
Again, longer term increase your premium costs as with time
your age increases and your chances of dying also increase.
Therefore, insurance companies offer low premiums for single
term life insurance. This also prompts you to discontinue
this type of insurance as you age. However, there is only a
remote likelihood of just 1% of a healthy person dying
within a year or a single term.
continued on page two
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