Term Insurance.. the ins and outs

Term assurance is probably the oldest form of life assurance and was typically in force for a period of one year. Today this type of policy usually has a term between 1 and 20 years. It provides coverage at a fixed rate of payments for a limited period of time, called the term. After that period expires, coverage at the previous rate of premiums is no longer guaranteed and the client can either:
• forgo coverage or
• obtain further coverage with different payments and/or conditions

Premiums are payable during the entire period of the assurance. If the life insured dies during the term, the death benefit will be paid to the beneficiary. Term insurance is the cheapest way to purchase a substantial death benefit for a specific period of time. The benefit is that the sum assured is payable in the event of death if death occurs during the period of the assurance.

These assurance policies are almost always non-profit policies. The most attractive feature of term assurance lies in the low premium rate at which the cover is provided.

Convertible Term Assurance
An additional benefit to term assurance is convertible term assurance. This policy allows the life assured to covert a term policy to a permanent policy at a later date. This can be done as long as the conditions of the policy have been maintained and premium payments made on time. An added benefit is that the assured is not required to undergo any new or additional screening at the time the policy is converted, regardless of his/her medical condition. This type of policy provides the benefit of obtaining less expensive term life insurance now while maintaining the option to convert to a permanent policy at a later date as insurance needs and financial resources change.

In short, the benefit is that the term assurance policy can be converted into a whole life or endowment policy for the same amount, without further proof of insurability and subject to the conditions under which the original term policy was issued. The premium payable on the converted policy is calculated in accordance with the rate for the age of the assured on the conversion date.

The conversion can sometimes be exercised at any time during the period of assurance, but normally the company does not allow the assured to do the conversion during the last 3 or 5 years prior to the maturing date.

The value of this policy lies in the fact that no proof of sound health is necessary when the assured requests the conversion.

Assurance with Reduced Premiums during First Few Years
Sometimes whole life assurance policies are issued at a reduced premium for the first five years. Thereafter the assured has to pay a slightly higher premium than the normal, equal annual premium. The low annual premium that is payable during the first five years is equal to half of the premiums that are payable subsequently.

These policies can be with-profit or non-profit policies, but some companies do not allow such a policy to share in the profits until it has been in force for five years. It is very important to know that the waiting period before ordinary policy values come into effect is normally considerably longer than for ordinary policies. The policy values are for example surrender and loan values.

This type of policy has a decided attraction for those persons who will probably earn a good salary or have a good income five years after the issuing of the policy, but who are not currently in a position to pay for the full cover requested when the policy is issued.

This type of reduced premium policy does not differ much from a 10-year term policy. The assured would then have the option to convert the policy into a whole life policy during the first 5 years. The low premium rate is usually not much more than the rate for term assurance.

Decreasing Term Assurance
Decreasing term assurance is a type of annual renewable term life insurance that provides a death benefit that decreases at a predetermined rate over the lifespan of the policy. It may also be called ‘mortgage life insurance’. The sum assured on a decreasing term assurance policy is reduced each year for the full duration of the term of assurance.

This type of assurance is commonly found in connection with mortgage transactions: The amount owing on a bond, reduces with each bond payment made. The fixed instalments made by the borrower consist of an interest and a partial capital repayment. The outstanding, still payable capital therefore decreases consistently. The interest amount that is included in each payment, also decreases constantly. The mortgage assurance policy is designed in such a way that the outstanding capital is covered at all times. It is clear that a certain kind of term assurance is needed for this purpose.

Mortgages are normally paid off over a fixed period of time, the maximum being 25 or 30 years. A policy covering the outstanding capital of such a mortgage therefore has a sum assured which decreases so that there is nothing left at the end of the term.