Few expressions used in the context of life insurance policies are misunderstood as often as short term life insurance. It does not simply mean that you are insuring your life in the short term, it means that the price of the policy is fixed for the short term.
There are different types of life insurance, and they are
- whole life policies
- variable life policies
- Universal life policies
- term life policies
Technically the term short term life insurance although used by everyone is not correct. Insurance applies when you are insuring against the risk that may happen such as fire theft cyclones etc. Assurance on the other hand is a type of insurance that protects you against something that will definitely happen. As Benjamin Franklin wrote in a letter
“‘In this world nothing can be said to be certain, except death and taxes.”
What does the term life policy mean?
Many people miss out on the benefits of term life insurance policies because they do not fully understand what short term is referring to. A common misconception about minimum term life insurance is that you are insuring your life for a short-term. This is not for short term life insurance means.
The use of the word “term” is short term life insurance refers to the length of time that the price of your premium for the short-term life insurance is fixed at a certain rate. When you understand it like that short term life insurance looks more attractive. Short term life insurance policies have a fixed price set for the term, so a 10 year short-term life insurance policy will have the same premium to be paid each month. This protects the insured party from price increases due to inflation, they are aware of their financial obligations and commitments for the whole term of their short term life insurance policy. The insured party is protected from price increases; conversely they are also protected from price reductions.
What happens to a short term life insurance policy at the end of the term?
The short term life insurance policy runs out, and whilst it can be renewed, often the new quote is prohibitively expensive.
When is a short-term life insurance policy beneficial?
Life assurance is a contract between the insurance company and the insured, the insured party guarantees to pay a premium for a period of time in return the insurance company guarantees to pay a predetermined beneficiary lump sum in the event of the insured persons death, or serious or terminal illness.
Life assurance is crucial if you have any person dependent on your salary at any time in your life. However, your life insurance needs will not be the same over the whole period of your life. For instance when you first get married and have no children for the first five years you will want to protect your wife in the event to your death. Should you die leaving three small children; the economic protection required will be larger than simply protecting your wife. When your wife is young and without children the chances are she can go out to work to pay the mortgage. With three small children that is more difficult, and her financial obligations will be far greater.
Therefore, you may wish to concede that you need extra protection once your children are young and until they have left college. If you die early without the added protection of extra life insurance your wife may not be able to pay for your child’s education. In circumstances like these the added protection a short-term life insurance policy gives total peace of mind. When it lapses you can be reasonably confident that your life in assurance requirements will not be the same.
You can take out another insurance policy that fully covers you for your immediate short-term requirements. It is often difficult, if not impossible in life to know when you are 25 what specific types of life insurance that you will need when you are 55. None of us are born with a crystal ball and we cannot see into the future in these circumstances short-term life insurance policies can literally be a lifeline. However short term life assurance policies should not be used as a replacement for whole life insurance product policies, they should be an add on because the whole life insurance policies have an investment benefit which is not present in short term life assurance policies.