Term Life Insurance

The original and the best?

Term life insurance is, historically speaking, the first form of life insurance to become idespread. Today it still remains a fundamental part of the insurance ecosystem, and is one of the best ways to insure that your responsibilities will be met if you die. Millions of people use Term Life Insurance to ensure that those who rely on them will not be left uncared for.

How it works

The principle of Term Life Insurance couldn't be simpler. You pay your premium for a set period of time (that's the 'Term' in Term Life Insurance). In return, if you die before the ened of the term, your insurer will pay a set amount of money to whoever you have designated as beneficiary.

This basic system has one big weakness: it does not deal well with illnesses that take longer than a year to develop. If somebody finds that they have terminal cancer within a one-year term, but does not die before the end of the term, they will find it very hard to renew their Term Life Insurance for another year.

To get around this problem, there exist several variations on this basic formula. With an Annual Renewable Term, the customer buys cover for one year, with a guarantee that he or she will be able to renew it at the end of the term. Another variation is the 'level term' system, in which the premium is set at a fixed rate for a period of many years.

Advantages of term life insurance

Term Life Insurance is a relatively good deal because of how accurately premiums can be calculated, and how low administrative and investigative costs are compared to other forms of insurance. Let's take each of those in turn, and explain them in a little more detail.

Given the long history and popularity of Term Life Insurance, actuarial tables for it are now extremely well-informed by a mountain of data. What this means is that your insurer can calculate pretty exactly how likely you are to die within your term - they probably know your life expectancy far better than you do. In turn, that means they can give you a fair price (i.e. the cost to them, with a little added on to cover costs and their profits).

Now, the low administrative and administrative costs. Quite simply, either you're dead or you aren't. It's quite easy to be sure whether somebody has died. A few forms of death (e.g. suicide) are excluded, but this is only an issue in a small fractions of cases.

Compare this to other areas of insurance, where determining whether an insurer is liable to pay can be an intricate and costly busines. Medical insurance costs are increased by the difficulty of deciding which medical procedures should be covered, travel insurance costs are increased by the difficulty of deciding hether items really have been lost on holiday. There is no such difficulty with term life insurance - yet again, reducing the costs and allowing customers to get a better deal.

Why you might need term life insurance

"No man is an island", said the great English poet and preacher John Donne. What we do - or fail to do - has repercussions on the rest of society, and most forcefully upon our nearest and dearest. As we go through life people come to rely on us, and term life insurance allows us to meet our obligations to them.

Term Life Insurance is something you should consider in particular if you have dependents. A Term Life Insurance policy will provide them the financial security they need to survive the turmoil of a relative's death. This could be directed to specific needs such as their education, or could be left as a general fund to be used as your children (or their guardians, or other dependents) see fit.

If you have a mortgage on your home, you may wish to set up a term life insurance policy that will cover the costs of repayment in the event of your death. This, again, will help your dependents, avoiding ugly scenes in which they are forced to leave their home because of your death. The same system can be applied to other debts which might be passed on to your next of kin.

It is possible to set up a Term Life Insurance policy to cover all these potential issues, arranging for a payout to be split between different needs. One common system is to arrange for a trust fund to be established, funded by the proceeds of a Term Life Insurance policy, and governed by rules which you set for how you would like the money to be spent. In short, Term Life Insurance is one of the most valuable forms of insurance, especially for those with dependents to care for.