by
Carl Hampton
08/04/2006
For some reason I always seem to receive a
lot of mail this time of year on the subject
of “Life Insurance”. Most want to know
the benefits or pitfalls of Term Life
Insurance over Permanent Life Insurance.
Term Life Insurance is by far the most cost
effective way of securing a life insurance
policy available to the general public. Term
Life Insurance covers a specific period of
time - normally the policy will run for
periods of 5, 10, and 20 years. As the age
of the insured increases, the cost of the
premium will increase. Premiums are
calculated on the mortality rate, which is
usually dependent on the persons age, sex
and whether that person uses tobacco.
This type of policy allows the insured or
the owner to pay a set premium for an agreed
period. The Insurance company provides
monetary benefits to the beneficiary in case
of death of the insured during that period.
Usually, the benefits received on the death
of the insured is income tax free.
There are four parties in term life
insurance: (1) the owner is the one who pays
the premium; (2) the insured is the one on
whose death, a death benefit (face value)
will go to the beneficiary; (3) the
beneficiary is one who will receive the
proceeds of insurance on death of the
insured; and (4) the insurer is the company
providing the insurance. Depending on the
Insurance company you choose, the premiums
can be paid monthly, quarterly or annually.
For example, Fred pays $50 dollars monthly
to XYZ Company for insuring the life of
Margaret (his wife) for a period of 10
years. Should Margaret die during the 10
years of the agreement, XYZ company will pay
$25,000 to Joe (son of Fred and Margaret).
Here the insured is Margaret, the owner of
the policy is Fred, the beneficiary is Joe
and the insurer is XYZ Company. If Margaret
does not die during the 10 years, XYZ
Company will not be liable to pay any money
to any of the parties involved. Often the
owner and the insured are same. That is, a
person buys a policy to cover his own death
and nominates a beneficiary. Husbands and
wives often insure each other in case of
death.
What is Term Life Insurance? It is a legal
contract with terms and conditions and
assumed risks. Sometimes there can be
special provisions in the agreement like
suicide terms, wherein on suicide of the
insured, there is no benefit accrued to the
beneficiary. Term Life Insurance is based on
two concepts: (1) theory of diminishing
responsibility and (2) Buy Term and Invest
the Difference (BTID). With Term Life
Insurance, the responsibility or liability
of the insuring company reduces as the
policy reaches its maturity. What makes Term
Life Insurance the most cost effective type
of insurance available to the public is that
there is no cash value at the end of the
period. Studies have shown that the
mortality rate in Term Life Insurance can be
as low as 1%. Hence the concept of BTID.
Rather than going for permanent life
insurance (where on the expiry of the agreed
period, the owner will accrue some cash
benefit and there is a savings component in
it) it is considered cheaper to buy term
life insurance and take care of the savings
components by investing in other areas.
With the present market giving good returns
on investments, buying a term life insurance
is a more attractive option than permanent
life insurance.
Have an opinion or a question you would like
me to answer, then write me!
Http://www.CarlHampton.com
