PolicyStreet presents to you our first education series – Insurance, as Easy as 1 2 3, where we shed light about anything insurance related in a candid and entertaining way.
If you have a burning question, reach out to us at admin@policystreet.com, leave us a reply below or even chat with us via www.policystreet.com. If your question tickles our funny bones, even better – we will feature them here to help others too.
Question 3. Why is term life the cheapest life insurance?
One of the ironies of life insurance is that it is essential, but we hope never to need it. No one hopes to die or get totally and permanently disabled, especially when there is so much life ahead of us!
Most people outlive their term life policies because inherently that is what term insurance is all about – a “just-in-case things goes astray” product – this does not apply to just the kiasi (scared to die) people out there.
Since the payouts are relatively low, insurance companies can then offer such low premiums.
Comparing term life to say a whole life as an example; now whole life is intended to be paid out at our death. Yes, you WILL get something back. Generally, the premiums for permanent insurance are higher at least initially than for the same amount of term insurance. A portion of the permanent life insurance premium is used to build-up a cash value in the policy. The cash value can be used in a number of different ways including allowing you to take out a loan against the cash value.
Term insurance provides protection only for a specified period of time and does not build up any cash value. A minimal amount of money needs to go toward funding the death benefit, because a significant portion of the premium calculation resides in the payout ratio or probability of death for an individual.
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