What is term life insurance?
We have already covered the importance of financial protection as part of a financial plan.
You can read this here.
As we highlight, financial protection is the solid foundation of any financial plan.
Life insurance is a form of financial protection.
But let’s get back to basics.
What exactly is it?
What does it cover?
Let us simplify it for you.
In this article, we’ll focus purely on fixed-term life insurance.
This article is relevant to everyone – we all have some kind of need for life insurance.
You may even have an old term assurance policy you took out many years ago and it’s sitting in a draw forgotten about!
What is Term Life Insurance?
Term life insurance is a type of financial protection that pays a lump sum on the death of the insured person.
Dependent on how it is set up, it could also pay a tax-free lump sum on the diagnosis of a serious specified illness in the insured person.
Life insurance is insurance to protect the future, currently unearned income of the insured.
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How does Term Life Insurance work?
A sum insured is set at the outset of the policy.
Furthermore, the term is fixed, this could be 5, 10, 15 years, or even longer.
When on cover, the premium becomes payable.
If the life insured passes away during the term of the policy, the sum insured pays out.
Simple really!
Term
At the outset of the policy, a term is set.
This could be 5 years, or 10 or 15.
It can be any term really up to the maximum allowable age.
Indexation/Inflation Protection
From outset, one can apply indexation or inflation protection.
This means the cover automatically increases every year by a set %.
As well as that however, so does the cost!
Specified Serious Illness Cover
In addition to life cover, a policy holder can build in serious specified illness cover.
This is where, if an insured meets a serious specified illness definition within the policy, a tax-free lump sum becomes payable to them.
The top claim reasons for specified illness in 2021 were cardiac and cancer for both male and female.*
The youngest male claimant in 2021 was aged 33 and the youngest female aged 36.*
Accelerated or Standalone Specified Illness Cover
This is where it gets a bit quirky.
If one opts to include specified illness cover, it can be done in one of two ways:
- Accelerated – under this option, any specified illness payout is deducted from the life cover sum insured so the life cover sum insured continues on the reduced basis
- Standalone – unlike the ‘Accelerated’ option, standalone illness cover is completely separate from the life cover so any illness payout still leaves the full life cover amount intact
Rider Benefits
It should be noted, that these are essentially ‘add ons’, some optional, some included.
Different providers provide different ‘Rider Benefits’.
Things like Personal Accident cover, Hospital Cash, Surgical Cash & Cancer Cover.
Some providers also provide services where you can get second medical opinions.
Conversion or Continuation Option
This is definitely a valuable benefit.
By paying a small additional premium, you can include a conversion option.
This means, at any point in the policy, you can convert your policy to a new policy with no medical underwriting required.
Irrespective of your state of health.
Correct, you could be really sick, on your death bed, towards the end of the term of the policy, and you can take out a new policy.
It should be noted this option is usually exercised towards the end of the term.
Is Life Insurance Benefit Taxable?
No, it’s paid out as a tax-free lump sum.
However, depending on who inherits the money, may have to pay inheritance tax.
Serious Illness Benefit
This is paid out to you tax-free.
How much cover and for how long do I need it?
How much cover you need is dependent on your circumstances.
As is the duration you require it for.
Without a doubt, you should take proper advice here.
A good advisor will be able to look at your circumstances and advise you on the correct levels of cover.
It’s important to not be under insured.
Also, it’s important to not be over insured.
Why do I need Life Insurance?
Unquestionably, there are many reasons we need life insurance.
We don’t want to pay for it, no one does, it’s insurance! No one likes paying insurance!
Nonetheless, we need it, to some level.
Events can get in the way of our family’s journey.
Events such as a serious illness or early mortality.
It’s important to protect ourselves and our loved ones against these risks.
Some of the more common reasons we see:
- You have financial dependents, maybe a spouse or children
- Debt is against your name and it would have to be paid if you passed away
- Simple, peace of mind to protect your family
Summary
Without a doubt, life insurance is not simply picking a sum insured.
There are clearly many variables at play.
Variables that can range from the correct amount of cover and term.
To variables per provider, certain providers of this cover provide different things.
It’s important to take proper advice when setting up any kind of life insurance.
How we help
Rule number one of financial planning: Protect what you have.
Protect your most important asset, your current and future unearned income.
Rule number two of financial planning, avail of our protection review.
We will discuss with you your circumstances and highlight any gaps in your financial protection arrangements.
Along with this, we will review any arrangements you have in place.
Finally, we will determine the correct level and type of cover for you and make any recommendations.
Importantly, any recommendations will be matched to your affordability.
Even if the optimum cover is beyond your affordability, some protection is better than none.
The end result, is peace of mind.
Not only for you but for your dependents.
If you don’t want to acknowledge the need for life insurance, that’s your prerogative.
But, ultimately, the worst can happen to us.
Get in touch
Either drop me an email, francis@fortitudefp.ie or request a callback.
You can also give me a call on 086 0080 756 or access our diary here and book a call at your convenience.
Why not visit our insights.
A multitude of information on various financial subjects covering all aspects of saving, investing, financial planning, protection and pension advice.
Our blog posts are intended for information purposes only and should not be interpreted as financial advice.
You should always engage the services of a fully qualified financial planner before entering any financial contract.
To discuss engaging the services of Fortitude Financial Planning please email us at info@fortitudefp.ie.
Fortitude Financial Planning Ltd will not be held responsible for any actions taken as a result of reading these blog posts.
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