Why buy Term Insurance?

Why should you buy Term Insurance?

You might wonder, why should you place your money in an insurance policy that will not yield a cash value after it expires and that will only pay off when you, as the insured, either passed on or suffer permanent disability? 

Before you come to a conclusion, consider this question – do you have dependants who are reliant on your income? If the answer is no and the money you have today is all spent on yourself, then you might not need a term policy, but if the answer is yes, you might want to consider getting one. 

Situations where you might want to consider getting term insurance

• Term insurance might be suitable if you have a low income but require a large cover to protect your family’s financial future in case of your demise or permanent disability. For similar reasons, this type of insurance would also suit a person who is the sole breadwinner and has moderate income.
• Term insurance is the minimum required to provide financial security for your dependents in case of your untimely demise. It is also the cheapest way to protect your future income from the risk of your dying before you have earned it.
• If your budget is tight, term insurance is a better option as cash value insurance costs more relatively. Term insurance is also suitable if you have committed to a large loan such as housing.
• If you are embarking on a new career or business venture, you can save costs by buying term insurance instead of a cash value policy so that your balance income or capital could be better utilised to develop your career or business. It is also relevant to persons who have invested substantially in new ventures by borrowing at high interest rates or by mortgaging their property. They can cover the risk of their dying before repaying all loans by buying term insurance which is relatively cheaper than other types of insurance.
• If you own a business, you could also use term insurance to provide life cover to your employees as a welfare measure at low cost.

Here are more questions to guide you along when you are considering whether to buy a term policy:

• Do you plan on supporting your children? – If you are sure that your children will become self-reliant and will not require your financial support when they grow up, you could go with a term insurance so you can protect them during your “wealth building” years or during their “growing up” years.
• Do you want a flexible life insurance policy? – With term insurance, you are not locked in by high payments over 20 years to life compared to a whole life insurance policy. You have the flexibility to switch insurers, compare premiums and set the term from between 5 to 40 years depending on your needs and requirements.
• Do you want your policy to protect or build wealth? – Term insurance premiums are low because the insured is only paying for financial protection in the event he/she passed away or become permanently disabled. If your intention is to both protect and build wealth, then whole life insurance might be a better option to grow the “cash value” of your policy while having financial protection at the same time.

Term insurance can be used to ensure future insurability. A person who desires large amount of cash value insurance may be financially unable to pay for it now. However, depending on the terms in your insurance policy, term insurance could be converted to cash value insurance in the future when your capacity to pay improves.

Term insurance can supplement endowment and whole life policies in a financial plan designed to take into account the capital and income needs of an individual. For example, term insurance can be used as a rider to a cash value insurance policy in order to increase death cover for a specific time period, for example, when a loan has been taken and has to be repaid.

Term insurance can also be useful for those who do not wish to save through cash value insurance policies and believe in the “buy term and invest the difference in other areas” theory. If you belong to this group, you can buy term insurance for death cover and invest your savings in other avenues such as shares, mutual funds and bonds to meet your income and capital requirements.

At the end of the day, before you buy a policy, be it term or otherwise, assess your needs and seek the advice of a professional financial adviser.

^{Sources:
Economic Times
Insurance Center
MoneySmart Learning Center}