What is term life insurance? Simply defined, term life insurance is life insurance that pays a benefit in the event of the death of the insured during a specified term. Notice that the main factor here is “within a specified term.” This is the key difference between term or “temporary” life insurance and permanent life insurance products available in the Canadian markets.
Imagine that Kyle Booth, after consulting with an insurance advisor decided that the best product for his insurance needs would be a 10 year term life insurance policy with a death benefit of $250,000. This means that in order to receive the $250,000 benefit from this policy, Kyle Booth would have to die within that 10 year period. If Kyle Booth dies in 15 years, he would have paid his premiums for all that time but his beneficiaries would still receive nothing in terms of the actual benefit of $250,000. As a rule, term policies do not build any cash value, therefore the policy would be worth nothing at the end of the 10 year term.
It is important to understand however, that the true benefit of a term life policy is not primarily the face value benefit, but the security of knowing that the people you love (the beneficiaries of the policy) are protected for a specific time period if you were to unexpectedly die.
You may ask, why would anyone ever get a term life policy if there is a chance that you will not receive the policy benefit. Well, the answer to that question is two pronged. Firstly, term policies have cheaper premiums. Secondly, term policies are beneficial when you know that the concern you are insuring against will one day come to an end.
Let’s take the example of a young couple with two young children, Bryan and Patricia Fergusson. They have 20 years left on their $200,000 mortgage and each have low monthly income. Neither individual would be able to cover the cost of paying off the mortgage on their own if something were to happen to the other, but for the sake of the kids, they want to keep the same house even if one of them dies before the mortgage is paid off. A 20 year first to die term life insurance policy could be just what this couple needs. It would not be prohibitively expensive and sure they get no benefit unless one of them dies within the 20 year term but they have the peace of mind of knowing that if one of them does die, the policy benefit would be paid out to cover the remainder on the mortgage and likely many other final expenses.
The mortgage is an example of a concern that has a limited time frame. If neither Bryan or Patricia die in 20 years, the mortgage would be paid off anyway and there would be no need for the policy benefit. If unfortunately either the husband or the wife dies within that period of 20 years, the policy would be paid out as this is exactly what the term policy was designed to insure against.