Posted by 
When selecting an option in term insurance, rather than opting for a showy element, it is about ensuring that the cover fits your life. Most plans pose the dilemma between the cover remaining flat, increasing or decreasing as your home loan or other liabilities come down. You could also throw in a useful accidental rider or some other riders, but that really is useful only if it actually makes sense to you, and not merely looks good on a policy document. The simplest way to look at this is that a plan should offer you optimal cover for your family without burdening you with either the premium amount or a drastically mismatched cover that has no use in the future. If you anticipate costs going up, an increasing cover might seem a good fit; if your home loan is gradually going down, a reducing cover might make sense; while a flat cover is beautifully simplistic. The optimum cover should ideally be almost boringly practical.
The Simplest Answer First: Most Individuals Choose Level Cover by Default
Level term assurance is your basic vanilla choice. This is often a good thing. Officially, level term means the sum assured is the same at all points throughout the term. This is to say the cover isn’t bobbing around. It is simple; it is plan-able. It is what a lot of people want when income replacement and family protection are the main aims, but they want nothing more complicated than that.
The situation where I would recommend level cover is when life has few complex variables. One household, one wage earner, limited responsibility, and simply the need for definite cover for a specific duration. It is good where the aim is to provide dependants with a lump sum or such regular payments in the event of adversity during the selected term. It is also a clean choice because the level sum assured does not alter each year, and the premium is generally level throughout the term from inception. That consideration makes it the most nondramatic and often commonsense option.
Pro-Tip: If protecting income and paying bills, and ease of understanding are the priorities, then level cover tends to be a very sound starting point. A boring policy is, ultimately, a good policy.
It Seems Sensible to Increase Coverage When a Larger Bill is Anticipated in the Future:
- When inflation, future cost increases, a greater time span and, thus, the likelihood of additional family requirements at a later point are the primary concerns, increasing term assurance is worth consideration. According to policy wordings and product guides, increasing the term, simply put, means that the cover increases year by year. Whilst recent product documents reveal increasing cover by a fixed percentage per annum, policy guides elaborate on the justification behind such increases, as the amount purchased at present may well prove to be insufficient at a later date, owing to increased costs incurred by the family and due to the rise in inflation. This is essentially what the option is there for.
- Increasing cover is worth contemplating when income is expected to rise, the cost of running the household may escalate, young children are to be catered for, or the family wishes for cover that moves with life instead of remaining stagnant, much like a well-meaning but outdated acquaintance. Young customers could be especially enticed by the prospect of the policy being stepped up along with future commitments. The limitation here would naturally lie in the fact that the initial premium may already have the aforementioned flexibility priced in; consequently, the decision ought to be predicated on the requirement for increased cover at a later point and not on the merit of the word ‘increasing’ itself.
- So, an ideal mental test is this: if future inflation, education costs or family expenses are foreseen to make the current sum insured seem too small in 10 years or so, then boosting coverage is a very tempting option. Conversely, if what is needed is a certain sum assured, and if that sum assured is known and fixed, then level cover would be a tidier, simpler, more straightforward bet. I’ll trade you: increasing cover the exciting new kid in town and level cover the tried and tested adult in the room. They both have their places, but not in exactly the same life.
When a Loan is the True Issue, It Makes Sense to Reduce Coverage:
- A decreasing term assurance should be examined if you mainly want a plan associated with a mortgage or similar declining liability. In terms of current product guidance, the definition for decreasing death benefit term insurance explains that it is ‘a contract which increases over time and is used to supplement the existing decreasing death benefit term insurance. Its purpose is to be taken alongside a mortgage where the mortgage amount is decreasing over time, so it should fit the exact purpose for that kind of insurance.’ Therefore, the level of cover falls in line with the reduction of the loan size.
- I feel that decreasing coverage is not a family protection tool in general use, but rather a highly specific one for a very specific problem. If you do have a declining loan like a mortgage or other similar debts, then a decreasing term assurance can be clean and cost effective, but if your family will require level income or costs from the benefit to pay for the running of the house or school fees and so on, a decreasing term assurance could start to become very problematic for the family due to the declining cover that would occur, rather than be a family security plan.
- It seems the clearest way of thinking about declining cover is to have one policy that covers the debt only and one that covers the family only. If it’s primarily the debt that needs to be covered, then this is a fine choice; if, however, the family is also intended to have cover at the same level all the way through the term of the policy, then it is generally not the right type of personality for the position, and it prevents many later problems.
Although a Return of Premium is Emotionally Reassuring, It Is Not the Same as Value:
- A return-of-premium term life plan (or TROP) provides life cover during the term of the policy and returns the premiums that were paid if the insured survives the entire term. It is the return-of-premium feature that usually excites potential customers, as it feels like being insured with a bit of a bonus at the end. The current product pages define it as a term plan with a survival benefit that pays back the premiums. There is a catch, though; current advice has a TROP that costs more, at times significantly so, than a standard term plan.
- A TROP would then become the obvious choice where peace of mind from the promise of a return of premiums truly matters, and the additional cost of such a product is not an issue. It might be good for those people who do not want to pay for something and get absolutely nothing for their money (the intention of term insurance being solely protection). This is the point where the choice must become personal; the standard term plan will often represent better financial value if pure protection is what the buyer desires; the TROP could be something worth looking into if the return-of-premium benefit gives them comfort and is the impetus to finally buying life insurance. Do not confuse the feeling of wanting the option with it being the right purchase in terms of financial worth.
- Rule of thumb: TROP should be selected only if the backup feature is really needed for commitment, reassurance, etc. If the client is willing to treat the term as pure risk cover, it is normally better to take out a plain vanilla term at a lower premium for the purpose. Buy the term for protection; let the premium backup be a side bonus, not vice versa.
Pro-Tip: If the sole motivation for purchasing TROP is due to the sensation that ‘there must be some redemption’, take a short break, then compare this with a conventional term insurance and fleecing your investment elsewhere. The return feature is indeed comforting, but comfort and value are two very different concepts.
Payout Style is More Important Than Most People Realise:
- The death benefit can be paid in a variety of ways, too, and this is another aspect that can determine the value that the term plan can offer to a family. At present, advice given in term plans indicates that the forms of payout are typically of three types: lump sum payout, periodic income payout, such as monthly, quarterly, etc. Payment and combined payment of both lump sum and periodic payments. Some term plans also offer a mix between the former two, where a lump sum is paid out at first and then regular payments. This is the best form of payout to many families that require immediate financial flexibility as well as financial security in monthly instalments.
- Personally, the best option for a payout is that which matches the financial habits and needs of the nominee. Lump sums benefit families that need immediate cash for immediate expenses, payment of debts or making a financial decision. Regular income may be an ideal option for families that would prefer monthly cash rather than a lump-sum payment. The combination of the former two seems like the most appropriate, as it meets both aspects of the situation. It helps meet immediate expenses while providing an ongoing financial backup. This can be helpful as the family would already have too much to handle and hence needs a less strenuous way to receive the benefit.
- One way to choose could be: “Is it likely that they manage large one-off sums better, or that regular income feels ‘safer and more practicable’. The right kind of structure doesn’t help to look clever on the page- it helps them to make the best of the money practically”. That’s when the choice becomes actually interesting.
Riders Are Small but Powerful Additions:
- Riders are really the small “bolt-on” extras that could make a term policy more suitable to the individual family’s situation. In the current term plans we show, the rider names include critical illness, accidental death and waiver of premium. Waiver of premium means that should you be critically ill or disabled in the future, you don’t need to pay future premiums on the term policy; it remains in force. Critical illness riders can make an extra payout to the family upon the diagnosis of specific illnesses, while accidental death riders cover an additional death payout in an accident-related scenario. They are good products, but only if they provide cover that matches the actual risks the policyholder faces.
- I believe that riders should be selected like seasoning, not like panic shopping. If a risk is already covered by another policy, or if the premium is already pushing the limits of affordability, then it is probably not worth the cost. However, without some other protection against disablement, critical illness or loss of income as a result of an accident, a rider can be extremely effective. The best rider is the one that really plugs a hole, rather than the one which reads ‘wow’ when examined in the proposal form.
FAQs:
1. Is Level term or Decreasing term better?
Level term is better for straightforward and constant coverage if your priority is a fixed premium and is within your budget. A decreasing term is best if you foresee future costs will increase and want a decreasing coverage value.
2. Is it worth getting the Return of Premium cover?
Return of Premium may be worth getting if the refund component of it is important on an emotional level and the additional premium is manageable. If the need for cover alone is what is most important and value for money, term insurance is more cost-effective.
3. Which are the most valuable riders?
Waiver of premium, critical illness cover and accidental death benefits are often considered the most valuable, but are only truly valuable if they cover a true gap in the client’s existing cover.