Skip to main content

Term Insurance Defined

When buying life insurance a person will want to consider various factors about their financial needs and about why they want insurance in the first place. What do you want to protect? What is an affordable premium? Are my needs flexible? What is the ideal amount of coverage? Do I only require temporary protection? By asking these questions, the type of policy that will fit your need becomes apparent. While there are many types of policies today, we will explore “Term” insurance.


How substantial you policy should be is also determined by things like mortgages and how complex needs become. Small business owners, for example, may want a fixed rate payment to help with budgeting, where a young family may use coverage as an aid in paying tuition.

To begin with, “term” insurance refers to a life insurance policy where the premium is locked in for a specific number of years. The term is the number of years. For example, a 10 year term policy carries a premium which is guaranteed for 10 years. The premium will not change over a 10 year period. After the first 10 years pass, the policy may renew (without the need for the client to show medical evidence) and the premium will increase beginning in the 11th year, for a second 10 year “term” of time. A policy like this often continues to renew with premiums increasing every 10 years until the policy ends at say age 85. Term polices used to end at age 65 but can also continue to age 85, depending on the company.

The premium at the “term” renewal is often stipulated in the policy and the increased future premiums are guaranteed. This makes the policy dependable, and convenient for future plans. The affordable nature of a term policy allows a person to protect their family or small business with a substantial amount of coverage with a guaranteed fixed rate premium.

In today’s financial environment, the 20 year term has become very common. The 20 year “term” guarantees a premium for twice as long as a 10 year policy. This becomes convenient when you want to have additional protection during child-raising years. As one might imagine, there are as many type of polices are there are needs. Available today is a 1 year term, where the premiums increase every 365 days, and there are products referred to as Term to 100 where the insurance companies offer a level guaranteed premium directly to age 100.

While a term policy will provide temporary protection for temporary needs like (mortgages, car loans, line of credit, child-raising years), people often outgrow their initial requirement. In other words, you may first buy a term policy for one reason, changes in life may require you to keep the policy for longer than you first imagined. This is why a term policy should be purchased with a “conversion” option. The conversion option allows you to “change” your policy into a longer lasting policy known as a permanent policy. This will be covered in a future blog.

A Term insurance solution can be as unique as your situation itself. Often your requirements change with your life and lifestyle. If you consider your “Financial Path of Life” a person wants to first pay off debt, then gets married, have children, buy a home, reduce debt again, pay for education costs, save for retirement, change career, retire, and then dies. (Specific order not important). As you grow in life, your need for insurance will also change- both up and down. One tailored solution is to “ladder” your coverage. This means if you can anticipate your requirements for insurance, you may also buy a combination of term insurance products. This way your premium can be locked in at your younger age, yet the amount of insurance changes with your need.

By way of example, you have a mortgage and two children and you are married. If you were to die, you might want to have the mortgage paid off, provide a lump sum of cash to supplement your spouse’s income, and provide for education costs. After 10 years, you expect the mortgage to be paid, you would have likely saved for the kid’s education, yet you would like to supplement your spouse’s income still. A solution might be to buy 20 year term for $100,000 and a further $100,000 in a 10 year term policy. With this ladder of insurance, based on your age today, would cover you for $200,000 for the first 10 years, then the ladder dropt the coverage to $100,000 for the remaining 10 years. At the end of the 20 years the insurance would be diminished, and the coverage is gone.

If you are in Nova Scotia and would like some insurance advice, please contact Corry Collins:
corry@maritimewealth.com
902-444-7000

Please like, share and comment on my newest post!


Comments

Post a Comment

Popular posts from this blog

Attend MDRT as an Aspirant or Manager

The Million Dollar Round Table (MDRT) holds its annual meeting this June in Orlando. Members from around the world will be in attendance. The annual meeting is the flagship event for the MDRT. Top advisors from over 70 countries meet and share world class ideas on how to grow your business and how to develop a thriving practice. The main platform is always full of motivation, business ideas and stories that may change your life. Ten thousand people are expected this year. The focus sessions are detailed sessions drilling down on the specifics of specialized subjects. Members and non-members are invited to speak on their area of speciality. Networking with leading industry people (who become friends) is one of the highlights. The mentoring program at MDRT provides a chance for non-members to attend as a guest.  The rules can be found at https://www.mdrt.org/membership/mentoring/ , but here are some of the particulars: The MDRT Annual Meeting scheduled for June 4-7, 20...
Post a Comment
Read more

Created by: Corry Collins - Top 10 Fall Financial Checklist - Save Time, Money and Tax.

Summer is not officially over until September 21 st . However, “back to school” week is a sure sign of the fall! The fall is a busy time in our financial planning office, as people seem to use this time of year to tidy up many small items concerning everything financial. It might also be a good time of year for you to do the same, especially if you aren’t in this “fall time” habit. Many people have a list of items to refer to when it comes time for financial clean up. Here is a typical list:       Update beneficiaries on your insurance policies’ if required.       Increase your disability coverage if your income has increased.       Review your RRSP investments against your current Risk Tolerance questionnaire.       Top up your Tax Free Savings Account       Increase your RRSP deposits by 10%       Question your bank to see if you can save money by renewing your mortgage ea...
Post a Comment
Read more

How Long Will 1 Million Dollars Last?

Once upon a time, a million dollars was a large sum of money. If you had it, you were a millionaire, and everyone was jealous. Today the question is often asked: “if you won a million dollars, would you quit work?” Well the answer depends on several factors like your age, your need for money, and even your health. To answer the question how long would one million dollars last, let’s look at it this way: How long will $1,000,000 produce an income for you before it runs out? Let’s say you needed to take $60,000 as an annual income to spend. Let’s also say that you wanted to increase that $60,000 by 2% per year just to keep up to inflation. To run the numbers, we would assume you wanted to invest your $1,000,000 in a relatively secure place. The rate of interest would be around 1.5% if you wanted a guaranteed return, or maybe a 5% return if you wanted to assume some risk. For argument sake, let’s give you 3.5% over time, and income tax at about 25%. With the above parameters, you...
Post a Comment
Read more