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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

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