August 11th, 2011 | Author: Mitch Reynolds

What is Term Insurance and How Does It Work

This article, what is term insurance is the third in a series of articles explaining the fundamentals of how different insurance products work. To get a full list of all articles in this series, please go to What is Insurance for the series overview.

Definition of What is Term Insurance

What is term insurance? Term life insurance or term insurance is a type of life insurance which provides a fixed premium rate (price) for a limited period of time (usually a number of years). The limited number of years usually designates the Term of the insurance policy (i.e. Term 10 is level premium for 10 years). If an insured person was to die during the term, and while all premiums are paid up to date, the death benefit of the term insurance policy will be paid out to the beneficiaries, tax free.

After the term number of years expires the previous rate for the term insurance also expires. Most insurance companies in Canada offer a guaranteed renewable term life insurance policy, but some don’t. Term life insurance is the least expensive way to purchase a large amount of life insurance in Canada.

Guaranteed Renewable Term Insurance

At the end of the term of your life insurance policy, the policy you originally purchased is no longer valid. The premium that was guaranteed to you has ended and so would your life insurance policy, unless it is guaranteed renewable. This means the life insurance company has guaranteed that you can continue being insured under the contract if you agree to pay a higher premium for the next term number of years (i.e. if you have a Term 10 policy, the guaranteed renewable price will be for the next 10 years and so on). This is important because you might not be healthy enough to apply again for another life insurance policy, yet you always have the option to renew your current plan. Renewal of a term life insurance policy is not permanent. Most insurance companies will terminate a term life insurance policy at age 80 to 85 if you haven’t cancelled your insurance by then.

How does term life insurance work?

Term life insurance works like permanent life insurance in that it satisfies a death claim for the benefit amount so long as all premiums are up to date and the policy has not expired or been cancelled. Unlike permanent life insurance, there is no cash value associated with a term life insurance policy. There is no return of premium dollars invested into the plan. The probability of a claim (the death of the insured person) is uncertain during the term of the policy. If the insured lives past their term, and does not renew the policy or it has expired, coverage ceases and all premium invested remains with the insurance company.

Preferred Rates on Term Insurance

Most Canadian life insurance companies offer preferred underwriting on their term life insurance policies. This means the insurance company will be able to reduce the monthly or annual premium as a reward for good health and lifestyle of the person applying for insurance. Preferred rates are usually reserved for non-smokers only. Generally good to exceptional health and low risk lifestyle can result in preferred rates. The best preferred rates can reduce preium by up to 30%.

What is Term Insurance – find out more from Life Guard Insurance

Taking the next step to understand what is term insurance and how it might fit into your financial plan is easy. Feel free to contact Life Guard Insurance to answer the question what is term insurance for your unique situation.

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