The Pit Falls of Term Insurance Products

Here we are going to look at a few issues that Term Insurance products have over other life insurance coverage. Most of the time people buy life insurance coverage based on price and not based on what each insurance type provides to you. Most people would automatically think that term insurance products are the most “value for money” proposition when it comes to life insurance however it is only under a small frame of reference that it is an efficient allocation of funds for your family. Below we will explore the many issues that term insurance have.

The first and most obvious short fall of term insurance is that it isn’t permanent. As the name would suggest it is only bought for a term which can range anywhere from 1 year to 20 years. After the term is over the insurer has every right not to extend you life insurance policy which would effectively mean that you have wasted all your previous premium payments for basically nothing. This is one of the main short falls of term insurance. The insurer is under no obligation to renew its policy with you. It will only do so if you are in very good health and do not pose a risk to the insurance company. If you have an illness that may threaten your life then you are most likely going to have you insurance company bar your from reinsurance.

Term insurance products are straight insurance vehicles and unlike other life insurance plans do not have built in saving plans or accumulatable cash values over time. Some people would think that his is good however for the majority of people being forced to save is actually quite a good thing as we are never as disciplined as we are supposed to be when it comes to our finances. Insurance products are also normally tax deferrable meaning that you can expense away the cost of insurance products (including the accumulated cash value) so whatever you put into the insurance product is in effect tax exempt. This is one of the loopholes in many countries tax systems that insurance companies are very happy to exploit. With term insurance however, you can’t do it and thus lose out on the benefit if you choose this type of life insurance.

Because of the “straight” nature of term insurance products, there are also no other riders or features that the insurance is bundled with. It is quiet normal to see most other life insurance products being bundled with health insurance, personal injury insurance, some even coming with nifty features such as credit card protection plans or even mortgage protection plans. You will see none of this in term insurance products. Some of the time the extra bundled features come to you at a discounted rate; depending on what you need at the time it could represent good value to you at the time. You won’t have this option with term insurance products.

With term insurance products, there is no way you can guarantee having a policy renewed until you die. This simply is the risk that you have to take when taking up this type of life insurance product. It is because of this “escape” clause with the insurer that you are paying so much less for your yearly premiums compared to whole life insurance programs. This is one of the mistakes that many people fall victim too. They see the much lower premiums and high death benefit and immediately sign-up without thinking of the eventuality of their actions. In a recent life insurance institute study revealed that term insurance products only paid out on average only 5% of the time. This represents an appalling pay-out ratio in any terms.

The last but most disturbing point of all is that the first premium that you pay for your term insurance is going to be the cheapest that you will experience in your life. This is true for term insurance as there aren’t any other cash flow enhancing vehicles associated with the coverage so you have to pay the raw premium every time without the aid of any investment vehicle. As such, the premium rates are set to continuously go up as you age. At some point in time the insurance rates will be so high that it will almost always be financially unsound to pay for the term insurance any longer.