The Pros and Cons of Term Policies

The primary advantage of term life insurance is that it requires a low cash outlay. This is because the term policyholder is paying only for the pure insurance protection, rather than term plus an additional amount to go into a side fund (cash value) that will be invested within the policy.

Who favors term policies? Term policies are usually favored by people who fall within one or more of the following categories:

• younger, cash-strapped people with relatively large financial responsibilities, such as young marrieds with small children
• people whose insurance needs will only last for a definite time period, such as until retirement (when a company pension/profit-sharing plan and/or Social Security kick in)
• people who have no trouble saving money, and who believe that they can invest the savings at a higher return that they would get if they left the money in a cash value policy.

The biggest disadvantage with a term policy is that the premiums rise at the end of each term, and can reach the point of being very hard to afford. Another disadvantage is that term policies lack some of the income tax advantages available for some types of cash value policies.

If you do decide to purchase a term policy, make sure that it is a guaranteed renewable policy. This means that at the end of the policy term you can renew without taking another medical exam, and without regard to how bad your health may be at the time of renewal.

You may want to take a quick look at our comparison of the various types of term and cash value insurance policies.