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Life Insurance: Temporary ("Term")
All temporary insurance — whether for a critical illness, disability, or medical expenses — has a “term” (or expiry date). A better name for “term life insurance” is temporary life insurance. This coverage creates assets for needs like:
- Providing financial stability for your dependents
- Paying off your mortgage so that your family has a place to live
- Funding college or university for your children
As your needs are fulfilled and assets grow, temporary life insurance becomes less important and can usually be cancelled.
In contrast, permanent life insurance is mainly for people with assets for their wants and charitable gifts. Tax planning is often a consideration.
The types of term life insurance
Temporary life insurance usually:
- Has a term between 10 and 40 years (depending on your age)
- Automatically renews at the end of the term (depending on your age) for a much higher premium
- Expires at an age when most are still alive (e.g., 75)
You can avoid this sharp increase at the end of the term by applying for new term life insurance if you remain healthy. A safer strategy is to choose a term that’s long enough to cover your financial obligations.
Note: There is also a product called Term 100 but confusingly, that is a form of permanent life insurance and does not have an expiry date.
How does term life insurance work?
Term life insurance works like other forms of temporary insurance.
You pay your premiums monthly (convenient) or annually (often cheaper). In exchange, your beneficiaries get a tax-free death benefit while the coverage is active (“inforce”).
If you cancel your coverage, you do not receive anything. Much like insurance on your home or car, your premium does not build any equity.
In contrast, permanent life insurance often builds equity (called the “cash value”). It is like buying a home. You can access the cash value via withdrawals, tax-free loans, or cancelling your coverage.
If you decide you want permanent life insurance in the future, you can often convert some or all of your term life insurance to permanent, regardless of your health. There is usually a maximum age like 65 or 70. Your new premium is based on your age at the time of the conversion.
Who qualifies for term life insurance?
Qualifying for life insurance — temporary or permanent — is much easier than qualifying for health insurance like critical illness insurance, disability insurance, long term care insurance, and medical insurance.
Why? With term life insurance, you usually cancel your coverage before making a claim because:
- Your coverage becomes increasingly expensive
- Your coverage expires before most people die
With term life, the insurance companies usually win because you paid premiums, and they didn’t pay a claim.
If you have health issues, you may face a higher premium or denied coverage.
Here are videos:
- Can I buy term life insurance on price?” | Question an Actuary 115
- Why get life insurance? (Roselyn Sanchez, Brook Shields, Danica Patrick, Boomer Esiaon, Lamar Odom, Buddy Valastro, Steve Jobs, Leslie Bibb) | Life Insurance Awareness Month
- What’s the biggest mistake when buying life insurance? | Question an Actuary 28
- Do I have too much life insurance? | Question an Actuary 48
- Who needs $220,000,000 of life insurance in Canada? | Question an Actuary 27
- Should I buy life insurance on my kids? | Question an Actuary 6
- How can I access the money in my life insurance policy? | Question an Actuary 4
- An under-used tax shelter (life insurance) | Question an Actuary 11
- How can you make your life insurance premiums tax-deductible? | Question an Actuary 14
- Is whole life insurance a good investment choice? | Question an Actuary 54
- Why does par whole life insurance matter again? | Question an Actuary 24
Here are articles:
How might term life insurance help you?
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