Term life insurance is “pure insurance” because when it only provides a death benefit to the beneficiaries. In contrast, permanent insurance such as whole life, and universal life, has cash value, but makes is more expensive. Term insurance is less expensive because it provides a specific death benefit, without the costs of an embedded investment.
Importantly, the coverage is for a defined period of time (the “term”) such as 10 or 20 years. Once the policy is in force, it only remains in force until the end of the term – as long as you are paying the premiums.
It is noteworthy that most term policies are convertible to permanent policies within a specific number of years. For instance, you can anticipate the accelerating cost of term insurance premiums and convert your policy before the premiums become prohibitively high.
There are several uses of term insurance, and herein are the most common ones:
Personal Costs Due to Death – These can cover funeral costs, as well as any pending debts and loans. These costs are easy to calculate, and many people have term insurance to cover these costs.
Mortgage Insurance – Term life insurance provides you with a more affordable way to ensure you mortgage payments in case of the unfortunate event of your death. The term insurance can be in line with your mortgage payment cycles of 10 or 20-year contracts. This is both a less expensive option, as well as better in other aspects when compared to a mortgage life insurance. Importantly, the proceeds from a term life insurance go directly to the beneficiaries instead of the bank lender. This means that the money can be used by your dependents as desired which could be even used to pay off other debts. There are also other personalization options available for a term life insurance policy.
Business Insurance – Business people can also use term insurance to cover outstanding loans with their bank. It can be also used to purchase a deceased partner’s shares on death within a buy-sell agreement. The premiums of buy-sell agreements are paid by the business, and are often tax deductible in Calgary, Alberta.
Key Person Insurance – When a company loses key individuals due to death, this can often cause additional problems to the company. In this case, a company can pay a key person insurance for any individual it deems to be “key” to its business. This can be its’ star salesperson, or its main business driver. In this case, the company itself would be the beneficiary of this policy. Thus, when a “key” person dies, the company receives a cash benefit to handle the problems associated with replacing that person. This can cover the expected lost sales, as well as costs to find, replace, and train the new key person replacement.