Part 1: What is Term Life Insurance, It’s Cost & Premium Calculation, Renewal & Premiums
Part 2: Who Should Buy Term Life Insurance, Advantages and Disadvantages, Is Term Insurance Right for You
Introduction to Term Life Insurance for Kids and Teens
This video explains the concept of Term Life Insurance in a simple, concise way for kids and beginners. It could be used by kids & teens to learn about Term Insurance, or used as a money & personal finance resource by parents and teachers as part of a Financial Literacy course or K-12 curriculum.
Suitable for students from grade levels:
- Elementary School
- Middle School
- High School
The topics covered are:
- What is term life insurance
- How expensive is term life insurance – how is the insurance premium decided / calculated
- Premiums when the term insurance is renewed
- What are the advantages / pros of term life insurance
- Are there any cons / disadvantages of term insurance
- Who should buy term life insurance – Is it right for you
What is term life insurance?
Term life insurance is a type of life insurance policy that guarantees payment of a pre-agreed amount, called the death benefit, to the beneficiaries stated in the policy, if the policyholder dies within a certain period of time – called the term.
This is in exchange for periodic payments by the policyholder, called a premium. Usually, the term is 10 to 30 years.
If the policy holder is alive when the term ends, they can either:
- Renew the policy
- Convert it to another type of life insurance, or
- Let it terminate, in which case the protection doesn’t continue
How expensive is term insurance? How is the insurance premium decided / calculated?
The cost of term insurance, or the premium, can vary from under $50 to over $100 per month.
This is because the premium varies a lot based on different factors like the policy amount, the policy holder’s age, gender, and health conditions such as existing illnesses or disabilities.
For example, Angie, a healthy, 30 year old woman, will pay much lower premiums than Sam, a 50 year old man with diabetes, even if the death benefit is the same.
If the term insurance is renewed, the premiums stay the same, right?
No. When term insurance is renewed, the premiums are recalculated based on the person’s current situation.
So if Tom bought a term life insurance policy when he was 40 with no health problems, and renewed it when he turned 60 but had been diagnosed with a heart condition, he would pay higher premiums after the renewal of the policy.
So is term life insurance right for me? What are its advantages?
Term life insurance is the purest form of life insurance that provides protection at the least cost to you. So the main advantage is its affordability.
Compared to other types of life insurance, term life insurance is the least expensive option for a given death benefit.
Are there any disadvantages of term life insurance?
The purpose of life insurance is to provide protection, and term life insurance does just that. However, it has some perceived disadvantages.
Since the term insurance is only temporary, not for the person’s whole life, there is no payout if the insured is alive when the term expires – leading to the perception that all the premiums were worthless.
Also, the low premiums of term life insurance have no savings component that a policyholder can dip into if needed.
Lastly, if the insured decides to renew the policy at the end of a term, they need to re-qualify for the insurance. So if they get a serious illness or disability during their previous term, there is a high chance that they may not qualify for another term.
Even if they qualify and have no health conditions, the premiums will be higher simply because they are older.
Who should buy term life insurance?
Term life insurance is ideal for people needing coverage at the lowest possible cost.
People with young children or dependent parents, those who have a large loan to pay off – like a mortgage, or those needing financial protection for a specific duration, should certainly consider term life insurance so that their beneficiaries won’t have to worry financially if something were to happen to them.
The downside of not having a cash component can be easily addressed if you are able to invest the money saved in premiums responsibly – “buy term and invest the difference” is a very popular strategy.
But for people looking for lifelong coverage or who are not very savvy investors, term life insurance might not be the best option. They can consider other options like whole life insurance or universal life insurance.
But these are topics for another time…