Term life insurance: Can I get by with temporary life insurance?

Temporary life insurance (also known as “term life insurance”) is life insurance covering an individual for a certain amount of time. Such a policy will only pay out if a person dies within “x” years from the date of the policy being taken out, where “x” is a number of years agreed between the insurance broker and the person taking out the policy. Temporary life insurance was initially designed to provide life cover for a specific period, offering significant payout for relatively small premiums. It might offer you a much greater safeguard against financial problems arising during delicate periods, such as the years when children are young (or going through higher education) or before a large loan is fully paid off. Term life insurance can offer peace of mind and ensure that your family isn’t left with unmanageable expenses or debt should the worst occur.

How term life insurance works

Broadly speaking, there are two main types of term life insurance, “level term life insurance” and “decreasing term life insurance”. Premiums will be determined (as with many insurance policies) on the applicant’s age and health at the start of a policy. With a renewable term life insurance policy, premiums will be reassessed at the stage when the policy is renewed to reflect the adjusted age (and health, if relevant) of the applicant.

Level term life insurance, or “level premium term life insurance”, is more common than annual renewable term insurance as premiums are guaranteed to stay at the same fixed level for an agreed amount of time, rather than being reassessed upon regular renewal. Common terms are ten, 15, 20 and 30 year terms. However it is not as simple as having a low fixed term for the entire policy, with policies not being subject to factors of change. Instead, your insurer will base the fixed premium on the combined cost of annual renewable term rates, adjusting for value over time, so the premium is fixed but will naturally be higher for longer policy terms (since higher age is more expensive to insure).

Sometimes term life insurance is taken out when someone is diagnosed with a terminal illness and is likely to die within 12 months or a similarly short period of time. Policies can help to pay for funeral expenses, secure a business or help to cover mortgage payments and other bills. Companies will generally not offer term insurance to an applicant of more than 80 years of age. Furthermore, suicide would almost certainly not be covered under a term life insurance policy, although accidental death would result in an immediate payout.

Other features of term life insurance

Some policies may include other features with term life insurance, such as total and permanent disability (TPD) cover or trauma insurance, but usually these will increase the premium. Term life insurance is a very competitive area, with dozens of companies contending to provide you with cover. Needless to say, shopping around to get the right insurance with all the necessary features is strongly advised.

Anyone with dependents and/or debts should consider life insurance, and (if full life insurance isn’t viable) term life insurance offers a lump sum payout that could allow your family to continue a reasonable standard of living. If you are thinking about taking out life insurance, it’s best to assess what your situation is, paying particular attention to your financial responsibilities and other parties reliant on you. If you have a young family, for example, and you don’t think that you can afford premiums on a full term life insurance, a better option may be to protect yourself over a ten or 20 year term in the first instance so that you safeguard the immediate crucial period.

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