Advantages of Term Insurance

Term policies are especially designed to afford protection against contingencies which either require only the taking out of temporary insurance or call for the largest amount of insurance protection for the time being at the lowest possible cost. The advantages of this type of contract may be enumerated briefly as follows:

1. Term contracts are often desired by those who need a large amount of family protection at a time when the income is so small as to make impossible the payment of the premium for an equal amount of protection under other types of policies. This is especially the case where family responsibilities have been assumed by young professional or business men who are just starting their careers and who, appreciating the necessity of adequately protecting their families against the contingency of early death, feel that they need heavy insurance protection at small cost pending permanent establishment in their profession or business. Persons so situated may feel inclined to subordinate the investment feature in life insurance to its protective function. Wanting all the protection possible during early years, they may feel that they can more advantageously use all available savings in their profession or business. Or, looking forward to a larger income later in life, they may reason that they can then advantageously replace or supplement this type of contract with policies of other kinds which have permanent protection as their primary purpose.

The extent to which large protection is granted by term policies for a small outlay at a time when such increased protection is absolutely needed at small cost, may be exemplified by the following rates charged by a certain company selected for purposes of illustration. The annual premium charged by this company for a $1,000 whole-life policy at age 25 (the policy in this instance being paid whenever death may occur) is $19, at age 35, $25.45, and at age 45, $36.50. But the risk of death during a limited term of years is less than that under a whole-life policy where the risk converges into certainty. Because of this fact term policies for five, ten, fifteen, or twenty years offer the advantage of a much lower annual premium. Thus in the case of the company referred to a five-year term policy for $1,000 at age 25 requires a gross premium payment of $11.09, and the premiums charged for successive renewals of this five-year contract are: at age 30, $11.65, at age 35, $12.50, and at age 60, $42.21. In the case of a ten-year term policy at age 25 this company charges $11.34, while the renewal premiums at ages 35, 45, 55, and 60 are, respectively, $13.10, $18.27, $34.54, and $51.20. The same principle applies to term policies for fifteen, twenty, or any other number of years. If such policies are renewable at the option of the insured without medical examination, the policyholder may feel that by a number of renewals he may enjoy a large protection for a considerable number of years at a low cost, and discontinue such renewals when the protection is no longer needed, or when the renewal rate becomes too burdensome. It should be noted in this respect that, whereas the rate for a ten-year term policy at age 25 is only $11.34, as contrasted with $19 for the whole-life policy at the same age, the latter rate remains the same throughout life, while the successive renewal rates for the term policy increase with advancing age until they become practically prohibitive, the rate charged by this insurance company being $34.54 at age 55, and $51.20 at age 60.

2. Term insurance may also enable young men to acknowledge their debt to parents or relatives of modest means who have given them their education or who have started them in business. Under such circumstances every young man owes this debt to parents and should, as soon as he is able to pay the premium, acknowledge it by carrying insurance for their benefit so that their investment in him will be protected against the contingency of an untimely death. In the same way a term contract may enable one to provide adequately during the early years of one's professional or business career for a dependent mother, sister, or other relative. Where the age of the parent is advanced the term of the contract may be so arranged as to afford protection during the probable lifetime - of the beneficiary. But where the beneficiary is comparatively young, the purpose of the term contract may be regarded as furnishing a large protection at. small cost, the insured looking forward to a large income in later years which will then enable him the more readily to make the protection permanent by other types of contracts. Again, the insured may desire additional protection while his children are young and his own estate is small so that in case of early death there will be an adequate fund for educational and maintenance purposes until the children become self-supporting.

3. Such contracts are also well adapted in many instances to furnish protection against some temporary business hazard. Many such contingencies may arise, but only a few need be mentioned to illustrate the usefulness of term insurance in this connection. A business firm may wish to protect itself for a definite number of years against the loss through early death of the highly valued services of an employee or of an official who is regarded as essential to the continued success of the business enterprise. Or the firm may have engaged the services of an expert in an undertaking which it will require a certain number of years to complete, and as the work progresses may be obliged to make a considerable outlay of capital which might be lost, or seriously impaired by the death of said expert before the completion of the work. Under such circumstances the firm might find a term policy, especially in view of its low cost, highly attractive as a means of protecting itself against loss during the period required for the completion of the work. The sum secured under the policy in case of death would indemnify the firm for any loss incurred by way of impairment of the capital, or by delay in completing the work, assuming that another expert might be found to continue the project. In many business undertakings it may be found desirable to protect the business during the first five or ten years usually the crucial and experimental stage when its promoters - are confronted with the task, frequently involving great risk, of establishing it on a firm foundation as regards clientele and credit. These are a few instances to illustrate how a firm or corporation may cover any temporary extra hazard, when the low cost of insurance is of chief importance.

In the same way an individual may, in many instances, use term insurance advantageously to enhance his opportunities or to make his financial position more secure. A young man may, for example, complete his college course or may start in business on borrowed capital which has been secured by protecting the lender against the possible loss occasioned by early death which would prevent repayment of the sum borrowed. Sometimes a person may have definite assurance of a certain sum of money in the future, such as an inheritance, pension, or death benefit, but is obliged during the interval to borrow money or to obtain insurance protection against death before the stipulated time arrives. In such cases term insurance may be used to great advantage. The lender will be doubly , protected, since the loan will be paid out of the inheritance in case of survival and out of the insurance proceeds in case of death. On the other hand, the need for insurance protection may expire when the policyholder is assured protection under the terms of the pension or insurance fund established by the firm or institution with which he is connected, the term policy in the interval of waiting having served its purpose as temporary protection. Again, money may have been borrowed on a mortgage on real estate, the mortgage running for a definite number of years and the mortgagor expecting to pay off the mortgage out of income during that period. While the mortgagee may feel entirely competent to accomplish the payment of the mortgage out of savings from his income, it is highly important to remember, as already stated, that it takes time to save, and that a resolution to save should be hedged with an insurance policy so that if the saving period is cut short by an untimely death the proceeds of the policy may liquidate the balance of the indebtedness. A $5,000 mortgage, which it is expected to pay in ten years, can, therefore, be advantageously hedged with a $5,000 ten-year term policy. In case of survival and the payment of the mortgage, the policy may no longer be needed and may therefore not be renewed. In case of early death the unpaid portion of the mortgage can be paid out of the insurance proceeds, the balance of the insurance money, if any, being payable to the insured's designated beneficiary. In fact, any plan for the accumulation of a fund through saving, no matter what the method adopted, should, as already stated, be protected by an insurance policy.