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Term or permanent, which one will meet my needs? Deciding which one is better among term and permanent life insurance -is a vital point of discussion for many years. Well, it’s not easy to comment on which of these coverage plans are good to take, as it depends on an individual’s needs and budget. Many factors can help an individual decide which plan will suits the best with their needs. If you wish to know about them, then let’s delve into the details for more information.
Term Insurance, as the name suggests it’s a coverage plan that helps individuals protect their family broadly in two cases, which are
- when someone can’t afford to buy a permanent insurance plan
- When someone wants coverage for a limited time duration
Next, let’s talk about the benefits. There is no doubt is the fact that a term insurance policy offers guaranteed death benefits. But when it comes to cash value- it's zero, and premiums might get increased at a pre-defined interval which might be five, ten, or twenty years- depending on the choice.
When it’s beneficial to buy term insurance?
Despite all this, term insurance still supplements permanent insurance coverage, especially during the high-need years. It’s the time when an individual’s family and financial responsibilities exceed much beyond the total income.
In such a scenario, term coverage act as a savior for obtaining fateful benefits without breaking one’s budget limits. In any case, if the selected coverage offers a convertible option, then one can easily claim the cash value in the urgency. With this, one will also become entitled to get permanent coverage claims in the future.
What is a Convertible Option?
Coverage becomes convertible only if it allows the policyholder to claim a cash value comparable to the coverage plan without presenting insurability testimony
If the facts above-mentioned sounds accurate then term insurance can meet all needs of an individual. The question arises, why it’s said that one will only purchase term insurance if he/she can’t afford permanent insurance.
Let’s find out the real cost of a term insurance plan to get an answer to this question.
What is the True Cost of Term Insurance Coverage?
Well, perfection is found only in books. Likewise, term insurance can't be the right choice for all individuals or under all circumstances. It comes with some drawbacks too. Therefore, one must be aware of the following things to decide whether going with term insurance is worth it or not.
It’s Benefits Are Limited
You have to die to win benefits. It’s a very unpleasant thing to hear. But it’s true. A term life insurance offers death benefits, but it’s limited for a defined period. The protection facilities will end as soon as the term coverage expires. Similarly, if the policyholder forgets to renew their policy on time, and due to which premiums stop, then coverage will end automatically.
It’s Benefits Are Time Limited
Let’s understand this with the help of an example. Suppose you have purchased term insurance coverage of USD 500,000 for ten years. As per the terms, if the policy expires on December 31st at midnight. In such a case, if the policyholder dies at 11:59 on January 1st, the beneficiary will receive the whole amount as death benefits.
However, if the policyholder dies on January 1st at 12:01, then the beneficiary will receive nothing. As per the terms, the policy has expired.
It’s Equivalent To Renting A Property
Buying a term insurance policy is similar to renting a property. Renting a house facilitates required amenities on an immediate effect. It’s limited to as long as rent leases end. Once the lease expires, tenants have to leave the space. It makes no difference whether you have paid rent for ten days or ten years. As soon as you stop paying the rent, you have to leave the space. The same case is applicable for term insurance. One can claim benefits until the policy expires. The duration of the policy doesn’t count if the policy expires.
It’s A Danger To Uninsured Entities
When the term expires and somehow you forgot to renew the policy, you will not be liable to claim any death benefits. The real danger arises when the policyholder becomes an uninsurable entity when the policy expires. As explained above, term coverage comes up with a convertible option, which means one can convert their term coverage into permanent as per their convenience. But, it doesn’t go with all term insurance plans, and then comes the real problem.
Although, if an individual found that their term coverage comes with the convertible option, then one needs to be aware of the fact that it comes with time limits. Yes, you heard it right. Therefore, in any case, if the policy expires before selecting the convertible option, one has to reapply for permanent term conversion. However, if the policyholder found to be uninsurable at that specific time, then you’ll be not offered with any benefits.
It’s Premiums Increase At A Constant Rate
In term insurance, premiums increases after a specific period. One has to pay an increased premium at each renewal, depending on the selected tenure. Sometimes, it’s very tedious for many individuals.
- Most individuals invest in term insurance when they are in their early 20’s as it may seem to have a more affordable option than buying a cash-value life insurance policy offering the same death benefits.
- When they reach their 40s, it becomes difficult to pay the premiums, as the rate goes up drastically.
- In their 50s, they have to face the fact that their term coverage premiums are equivalent to the cost of a permanent insurance plan.
- Many of them choose to drop the policy as soon as they enter their 60s. It’s not because they don’t want the protection. It’s because they can’t afford to pay their increased premiums.
- On the other hand, if the same person chooses to invest in permanent coverage in their early 20s, they have to pay the same premiums. It’s why one must look into all factors before investing in any plan.
While planning to invest in purchasing any coverage, whether it’s a term or permanent, don’t forget to look at other benefits other than premiums, says the experts at Insurtika- one of the best insurance companies.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.