Term Insurance is a very popular option in people’s portfolio of insurance. Not only does it provide good coverage on death and disability, it is very affordable too. However, when one is considering purchasing a Term Insurance, here are a few things to look out for to get the best deal.
1. What is the coverage schedule of the Term Insurance?
By coverage schedule, I am referring to how much cover the Term Insurance offers at each period of time. There are generally 3 main types of coverage schedules. The first is the level Term Insurance, and is the most common, where coverage and premiums are maintained constant throughout the period of the insurance. Thus if you purchased a $100k death benefit Term Insurance, the cover is fixed at $100k from day 1 of the policy and you pay the same premium throughout the duration. The second type is a decreasing Term Insurance. This means that coverage and premium decreases with time. This type is more commonly used to provide mortgage protection, in the event that the policy owner is unable to service his mortgage due to death or accident. As the mortgage is expected to decrease with time, thus the Term Insurance cover also can afford to decrease with time. The final type is the increasing Term Insurance, which is not common at all and is basically the opposite of the decreasing Term Insurance.
2. Is there a renewable option?
Renewable options give the Term Insurance policy owner the right to extend the cover of the policy beyond the initial stated duration. This means that if you purchased the Term Insurance to last for 20 years, and at the 19th year, you decide that you need the cover to last another 5 years, you can choose to exercise this renewable option to extend it. Of course, premiums will be higher at the point of extension due to the fact that you are older when exercising the option. However the great benefit is that there is no need to prove that you are insurable, i.e. there is no need to show evidence of your health. This can be great as it may be quite difficult to get insurance when you reach an older age and prone to various illnesses and conditions.
3. Is there a convertible option?
A convertible option to a Term Insurance means the right of the policy owner to convert the policy to a Whole Life policy. This means that you can change your Term Insurance policy to a Whole Life policy even when your health has deteriorated and may even be uninsurable with new policies. However, there will naturally be a few trade-offs:
- Premiums will be increased due to your increased age at the point of exercising the option.
- Many insurers will limit the maximum age at which you, the policy owner can exercise the convertible option.
- Conversion may also reduce the original coverage value depending on when the option is exercised.
There is a further decision to be made when exercising a convertible option and that is whether you want the converted Whole Life policy to start at the point of exercising the option or to start from the beginning when the Term Insurance was first purchased. Due to the fact that a Whole Life policy accumulates cash value through the years, if you decided on the latter option, you will need to fork out a sizable amount to cover the cash value that should have been accumulated had the Life Policy been started from the very beginning.
This convertible option is very useful for those who initially intend to purchase a Whole Life policy but due to limited budget, cannot afford it at the time. This option will then allow you to defer the purchase of the Whole Life policy until such a time when you have the finances to convert.