What is term insurance?

Term insurance is where covered is provided for a fixed term. The sum assured will only be payable on death, with no investment benefits nor payment on survival.

It is important to understand this concept. Should you survive past the end of the term, you will not receive any payment as your policy will expire. Should you stop paying the premiums at any time, cover will stop, and there is no surrender value. This is unless you pay extra on your premiums to have a waiver of premium so you can get a break from premiums should you lose your job.

For all types of term insurance, the amount of your premiums is determined by certain variables such as your age, the amount you want to be insured for, the length of the term, and whether you smoke or not. You may or may not need to undergo a medical. Ultimately, the insurance company lays bets on the chances of you dying whilst the term lasts.

Level term insurance means that your premiums are set at a level and do not move up or down. The sum assured will remain the same throughout the term as well, which is a disadvantage, as it will not take into account the effect of inflation.

Increasing term assurance is a fixed term policy where the sum assured will increase, either by a set percentage or by the Retail price index (RPI) throughout the policy term. Your premiums remain level throughout the term if the sum assured rises by a set percentage, or will rise according to the RPI if the sum assured does the same.

Renewable term insurance is policy lasting for a smaller period, usually five years, which can be renewed, although the sum assured cannot be increased, whilst the premiums will increase with age. Renewable increasable term insurance is the same as above but provides for an increasing sum assured.

Convertible term insurance provides the option to convert parts of the sum assured to whole of life, endowment or further term assurance without further medical evidence.

Decreasing term insurance is where the sum assured decreases over time; hence, the premiums are set lower. This is commonly used to cover a mortgage.

A Gift inter vivo policy is designed to cover for inheritance tax where a potentially exempt lifetime gift has been made. The sum assured will decrease over the seven years that a person will need to survive after giving the gift to make inheritance tax not payable.

Finally, there is the level family income benefit, which provides a tax free income from the date of death until the term is ended. You can commute the income to a tax free lump sum.

 

 

 

 

 

 

 

 

 

© AskFinancially.com 2008

Life Insurance

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