Term Assurance - Advantages and Disadvantages

Term assurance contracts are different in that they are based on the length of the coverage term, whether they can be renewed , the length of the price guarantee, and whether they can be converted to permanent insurance.

There are three main types of term assurance - annual renewable term (art), fixed-rate level term, and decreasing term. The annual renewable term (art) is a pay-as-you-go form of life insurance. Each year you pay for your mortality costs for that period, plus any expenses. On each yearly anniversary, you are a year older, your mortality costs have increased slightly, and your premiums increase as well. You can renew your policy each year simply by paying the premium.

Fixed-rate level term assurance policies allow you to lock in pricing for anywhere from 5 to 30 years, unlike annual price increases that you would have with the annual renewal term assurance policy. To set up new life insurance policies is expensive for the insurance company, ie. doctor’s reports, and medical examinations, etc. The insurance companies can therefore spread these costs over a longer period of time by selling level term insurance policies because people tend to keep these policies longer than they keep annual renewable term products. The majority of level term policies can be converted to permanent policies at any time, regardless of health.

Decreasing term assurance policies have coverage that reduces annually however, the premium stays level for the duration - usually 15 to 30 years. There are two types of decreasing term policies, level decreasing term coverage and mortgage decreasing term coverage. The good news about both types of decreasing term policy is that the rates usually won’t change for the duration of the term you choose. The bad news is that your life insurance coverage is reducing at a time when your living expenses are increasing.