November 22, 2017

Advantages and Disadvantages of Term Life

Some of the advantages of term life insurance are:

  • Initially, the cost is very low. This is attractive for individuals or businesses who have a large need for insurance but limited resources to pay for it.
  • Can be used as temporary protection for temporary needs. For example, decreasing term life insurance is frequently used to cover the decreasing financial obligation associated with debts.
  • Term insurance can be flexible. It is often used to provide additional protection for an insured.

Example: A husband has a relatively small whole life policy and becomes a father of twins. His responsibilities have changed and there is need for large amounts of additional life insurance. Term insurance could be the solution and could even be added to his existing policy as a rider.

Disadvantage of Term Life Insurance

  • Over a long period, renewable term insurance becomes very expensive. Although initially the level term premium is low, it increases with each renewal based on the increased age. Therefore, a relatively low premium at age 35 becomes an expensive and sometimes prohibitive premium at 55 or 60.
  • Even though the premium for decreasing term remains level for the life of the contract, the level premium pays for less and less insurance. In the later years of a decreasing term policy, the actual cost of the remaining insurance tends to be expensive.
  • One disadvantage of term life insurance is exactly that, it is good for a limited term. If the policy is not renewable or because of the increasing cost of the policy, the insured can be left without insurance at an older age when they need the protection. Term policies are actuarially designed to expire before you do.
  • Term life insurance is pure death benefit only. It offers no living benefits such as guaranteed cash value.
  • Even if the term policy is renewable. It is generally not renewable beyond certain ages such as 65 or 70.