Term Life Insurance Explained

by | Jun 18, 2020 | Life Insurance, Term Life Insurance | 0 comments

 

Term Life Insurance is temporary life insurance that lasts for a specific period of time (or term). Most common are term lengths of 10 or 20 years, but policies can be issued for term lengths from one year to 40 years, or to a specific age, such as 65 or 100.

If the life insured passes away during the term of the contract, the death benefit is paid out tax-free to the beneficiaries named in the policy.

 

How Can Term Life Insurance Protect Me?

 

Protect Your Income

If you have loved ones who depend on your income, consider how they will be affected when your income is no longer there. Life insurance can help by providing a death benefit payout that can help to replace your income, meaning that your surviving family members may be able to continue to live the kind of lifestyle they’ve become accustomed to.
 

Cover Your Mortgage and Other Debts

When you pass away, chances are that you’ll leave debts behind, such as a mortgage, credit cards, car loans, or a line of credit. Life insurance proceeds can help your surviving family pay off those debts, or, in the case of a mortgage, invest the proceeds and continue to pay the mortgage on the family home.
 

Provide Education Funds for Your Children

When a parent passes away, the surviving parent may not be able to save enough to pay for their children’s education. A term life policy can provide a payout that can help ensure that your kids will be able to go to postsecondary school.
 

Protect Your Business

Term life policies can help business owners protect against the expenses that can arise when someone passes away. A death benefit may be used to fund a buy-sell agreement or to hire additional staff in the event that a key person passes away, helping to ensure that the business can continue to grow and thrive.
 

Types of Term Life Insurance

 

Single Life Traditional Term Insurance

  • One person is insured for a specific period of time
 Joint First-to-Die Term Insurance
  • Two people, often spouses, are insured under one contract for a specific period of time
  • The death benefit pays out tax-free to the surviving life insured, and the policy is then cancelled (though there may be an option for the survivor to convert a portion of the coverage to permanent insurance for themselves)
 Joint Last-to-Die Term Insurance
  • Two people, often spouses, are insured under one contract for a specific period of time
  • The death benefit pays out tax-free to a named beneficiary (or to the estate) when the second life insured passes away
  • This type of policy is often used to insure against the tax liability that arises when a second spouse passes away
 

Why Choose Term Life Insurance?

 
The biggest draw to term life insurance is its flexibility. You choose the coverage amount and the term length, and you can also choose to add optional riders or benefits, allowing for you to customize your coverage to meet your needs exactly. Additionally, premiums for term life insurance are generally lower than those for permanent insurance, due to the simple fact that coverage is temporary. Over the course of the term defined in the contract, premiums are guaranteed not to increase. As long as required premiums are paid, your coverage is guaranteed over the specified term. Another reason to choose term life is its renewability and convertibility. When you apply for a term life policy, you will have the option to
choose a renewable term, as well as a policy that can be converted to a permanent plan in the future.
 

What About Mortgage Insurance?

 
As a general rule, we don’t like to recommend traditional mortgage insurance. The main reason for this is that, while your outstanding debt decreases over time, your premiums remain the same. This means that your coverage amount also decreases over time, so you’re paying the same amount for a decreasing amount of coverage.
 
Let’s assume that you have a $250,000 mortgage. Traditional mortgage insurance covers only the outstanding balance. This means that if you’ve paid off $100,000 of your mortgage before you pass away, the policy will pay out only the amount outstanding on the mortgage, or $150,000. If you opt for a $250,000 term life policy instead, the full $250,000 will pay out regardless of how much you owe on your
mortgage.
 
Our other concern is that mortgage insurance isn’t always a guaranteed payout. There have been many cases where mortgage insurance claims have not been paid when an insured person passes away. With a traditional term policy, your payout is guaranteed as long as premiums are paid (with a few exclusions in the first two years of the policy).
 
While both traditional mortgage insurance and term life insurance can cover your outstanding mortgage when you pass away, term life is a better value for your money, has a guaranteed death benefit, and may provide your family with extra funds that they can use for your final expenses, debt, education for your children, or other expenses.

 

What Happens at the End of the Term?

 
You have several options at the end of the term period. You can renew the policy for another term at a higher premium – this will happen automatically if you take no other action. Provided that your policy is convertible, you may also be able to convert the policy to a permanent one. If you don’t need permanent insurance but you would like to continue coverage, you can also choose to apply for a new term policy. If you don’t need the coverage any longer, you can decide to cancel your coverage altogether.
 

What if I’m Not Sure if Term Life is Right for Me?

 
Blog articles and automatic quotes are a great place to start, but they can’t replace a full insurance needs analysis, which looks at all the variables and determines the best policy for your specific needs. We’d be happy to look at your unique situation and recommend the right policy for you.

Send us a message, request a quote, or give us a call today so we can get started on your personalized plan!

 

About the Author

 

Jordan Richardson, B.Sc, LLQP, QAFP™

Jordan Richardson, B.Sc, LLQP, QAFP™

Founder - NorthWise Insurance

Jordan was born in London, Ontario, but has lived all over the province, spanning from Windsor to Sudbury. He graduated with Honours, Bachelor of Science (B.Sc.) in 2013 from the University of Waterloo, and quickly pivoted away from science and to the financial services industry. Jordan acquired his Life Licence Qualification Program (LLQP) in 2014, and more recently obtained the Qualified Associate Planner (QAFP) certification. Jordan is currently one exam away from his Certified Financial Planning (CFP) designation, and the Chartered Life Underwriter (CLU) designation. With early success in the financial service industry, Jordan quickly was thrust into management roles, specializing in team building through creating great work culture, and in digital marketing strategies. These skills were utilized in the creation of NorthWise Insurance, where the goal is geared towards an omnichannel advice platform that offers a wide range of financial products, all available digitally.

Jordan is engaged, and has two beautiful daughters. He is the Chair of the Young Professionals Association (YPA) of Sudbury, and mentors a little brother in the Big Brothers, Big Sisters Program. When Jordan isn’t working or with his family, you can find him on the golf course or playing basketball.

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