Do you know that there are many variations of Term Insurance Plan, ranging from Mortgage Insurance, Decreasing Term Insurance, Level Term Insurance to Fixed-Term Renewal Term Insurance?
Each variation has its own benefits so how do you differentiate from them and maximize the benefits out from them. Learn how you can do so with this article.
*Note: some of the benefits explained here may be different from each insurer. If in doubts, it's always better to clarify with a Professional Financial Planner and discuss it through.
Some Insurance Basics
Term Insurance is basically a plan that provides a lump sum cash benefits against unforeseen situtations like Premature Death or Total and Permanent Disability. You can enhance the coverage with additional benefits like covering against Critical Illnesses with a Rider.
This may seem very similar to a Whole Life Insurance but the difference between the two is that Term Insurance does not have any cash value or savings component in it. If one survives at the end of the Policy Term , the policy will terminate and the life assured will not get anything out of it.
But the key benefit of getting a Term Insurance is that you are paying much lesser premium for the same amount of coverage as compared to a Whole Life Insurance Plan and the premium differences can be better used on other channels, e.g. Investment Property, Unit Trusts, Stocks which can give you an overall better monetary returns.
Now that you have some basic knowledge on the nature of Term Insurance, we should go on to differentiating the different types and how to maximize the benefits.
1. Mortgage Reducing Term Insurance
If you have a mortgage loan with a Financial Insitution on a property, you would definitely need to have a Mortgage Reducing Term Insurance to protect the monthly loan repayments and to help ensure that the immediate family members will not lose the property should anything happen to the Loan Owner.
Mortgage Reducing Term Insurance Or Decreasing Term Insurance?
It's better to go for a Mortgage Reducing Term Insurance because this Plan has a Interest Rate that will determine the rate of annual reduction and the amount of deduction is rather similar to your Mortgage Loan as you pay off.
A Decreasing Term Insurance usually does not have such feature and the reduction is based on the number of years. For example, a $100,000 coverage for 20 years would mean an annual fixed reduction of $5,000 (=$100,000 / 20 years).
Mortgage Reducing Term Insurance Or Level Term Insurance?
Depends on your level of Financial Planning being done - this will help to determine which plan would be a better choice. If you have all your Financial Concerns being taken care of by other insurance, it would only be wise to just take up the Mortgage Reducing Term Insurance.
Level Term Insurance may seems to be a better choice because the benefits are level throughout. But remember that you get nothing out from it at the end of policy term and getting this plan would only add on to your financial commitments.
The Benefits Of Mortgage Reducing Term Insurance:
- The premium for such plan may relatively be the lowest as compared to getting a Level Term or Decreasing Term.
- You may get to keep the plan as part of your Financial Planning even after you have cleared all your Mortgage Loan.
- You have the option to terminate the plan, once you have cleared your loan, without any penalty and the financial impact is lesser because you have relatively paid lesser and the difference can be used for on other areas.
2. Decreasing Term Insurance
As shared, for a Decreasing Term Insurance, the Sum Assured or Amount of Coverage decreases with the Policy Term and as compared to a Level Term Insurance, the premium is lower.
When Should You Go For A Decreasing Term Insurance?
To give you a clearer picture of when you should go for a Decreasing Term Insurance, we use the example of planning for a child's university education. For example, you know that your child may need around $80,000 in 20 years time so you start a special savings plan just for this and you are the main contributor.
But you know that the savings will slowly add up over time and there's a possibility of some unforeseen circumstances that may happen. So you get a Decreasing Term Insurance to cover that difference. Your savings add up, your insurance coverage decreases but the whole period of 20 years, there's always the $80,000 that will be ready at any point of time.
Benefits Of A Decreasing Term Insurance:
- As compared to a Level Term Insurance, you are servicing lesser premiums.
- You are more objective in your Financial Planning - you get yourself covered with the right type of insurance and without interfering the rest of your planning.
3. Level Term Insurance
As mentioned, the benefits remain the same through the whole Policy Term and is usually part of the most important aspects of Financial Planning - making sure that your immediate family is well taken care of in your absence or immobility.
When Should You Go For A Level Term Insurance?
Many would use a Level Term Insurance to cover themselves throughout their working life or to plan for a legacy when they are gone.
The reason is simple. As you are working and looking forward to your retirement, part of your income helps to take care of your family's expenses. If you are gone midway, the expenses will still be there. Therefore a Level Term Insurance will help to take care of these expenses until someone is able to take up your role.
If you love your family and would like their life to be better, leaving a legacy behind through a Level Term Insurance is definitely a good choice as compared to a Decreasing Term Insurance.
Benefits Of A Level Term Insurance:
- The Benefit is level throughout the policy term
- You can leave behind a significant amount of legacy especially if you get the insurance early (lower premium) in your life stage.
4. Fixed-Term Renewal Level Term Insurance
Similar to a Level Term Insurance in terms of benefits, the difference here is that your premium will go higher after the fixed term renewal but the benefits remaining the same. And the fixed term here can be every 5, 10, 15 or 20 years.
Why Would You Go For Such Insurance?
You are budget-conscious and calculative or you are the pessimistive type and you would like to get the most benefits with the lowest premium paid during the inital stage.
For example, a 30 years old gets a Level Term Insurance of $500,000 to his Retirement Age of 65. His premium commitment is 35 years and he may be paying around $200 a month (indicative) for the rest of the term.
Another 30 years old gets a 5-year Fixed Term Renewal Insurance of $500,000. His premium could be as low as $50 a month. And the renewal rate is at $100 a month after the 5 years.
Unfortunately, 10 years later, both met with an accident and the same $500,000 is paid. But the latter would have paid much lesser than the first even though the benefit is the same.
There's the Pro of having a Fixed-Term Level Term Insurance - lesser premium needed in the initial stage. The Con will definitely be that you will be paying so much more as compared to getting a Level Term right from the beginning.
Benefits Of A Fixed-Term Level Term Insurance:
- If you have a lot of Financial Commitments but would still like to do up a proper Financial Planning, you get to do so.
- If there's any unforeseen circumstances in the initial stage, as compared to someone who has a Level Term Insurance, you have actually paid lesser for the same benefit.
There are indeed many types of Term Insurance and each with its own unique benefits. You are unique on your own as well and you understand yourself better than anyone else. Now that you know what are the different types of term insurance available, you should be more well-informed now and in a better position during your discussion with a Financial Planner.