Monday, 30 November 2009

What is This Term Insurance All About?

People often use the expression term insurance and think that they are talking about something other than life insurance. Well gang, term insurance is another form of life insurance. Let me get into a little more explanation and see if I can clarify some things for you.

Life insurance in its original design covered a person's life for a specific amount of time and paid a specific amount of money to a beneficiary upon that person's death. Thus life insurance, you were covered for your life. Calculations for costs were made, based on average life expectancy, cost of running a business and current long term investment returns. Actuaries would take all this information and calculate the amount of money a person would pay per thousand dollars of coverage and come up with a cost - for life.

Things changed over time. People had short term financial obligations like mortgages, lines of credit etc, wanted to insure it, but only for a certain period of time, or as you would have it, for a "term". That is where the expression " term insurance" came to pass. Rather than covering a person for their life expectancy, they were only covered for a term.

This brings the cost of the live insurance down. Think of it this way. Your car insurance premiums and your house insurance premiums are usually established for a year at a time. When your renewal comes up each year there is a "price change", usually up. This is really "one year term insurance", except it is on your house or car, not your life. If your car insurance broker said that you could have your rates "guaranteed" for 10 years, it would then become a 10 year "term insurance" plan on your car. We all know the average cost for the 10 years will be greater than if you had it one year at a time.

Just imagine if your car insurance broker suggested that you could get car insurance with a guaranteed cost for the rest of your life. It would never happen and if it did, the costs would appear high now, but 20 years from now the cost would probably sound cheap.

Hope this helps in your thinking. Term insurance is really Live insurance with the costs adjusted every so many years. As well, most term insurance gets prohibitively more expensive when you get into your late 60's. With the exception of term to 100, which requires an entirely separate discussion, most term insurance runs out by age 80 or sooner, probably when you will need it the most.


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