*As published in the Feb 2012 issue of FinanceWorks.ca

You’ve got insurance on your home, car, and possibly an extended warranty on your LCD television but do you have insurance on your greatest asset, yourself? If not, is cost your limiting factor?

Term life insurance, or life insurance that covers you for a specified length of time, is an inexpensive way to provide protection for you and your family. Typically purchased for periods of 10 or 20 years, term policies pay out should you pass away during this period. 

The rates are reasonable for those under 50 years old and in good health. In addition, insurance premiums are about half the cost for non-smokers than smokers. And if you have better than average health you could see additional savings of up to 30%.

The cost in relation to the amount of coverage is minimal compared to other forms of insurance such as car insurance. For example, insurance for a 2011 Nissan Versa costs $114 per month. The estimated replacement value for the vehicle is $18,500. That means the cost of insurance in relation to the amount covered is 0.62% or 79 times more expensive than term life insurance.

Unfortunately, term insurance gets quite expensive at an older age as the cost increases exponentially at the end of each term.

For example, a 40-year old woman (non-smoker) purchases a $250,000 20-year term life insurance policy at a cost of $26.10 per month from BMO Insurance. Twenty years later, she decides to renew her policy. She now has to pay $371.92 per month for the next 20 years; an increase of 1325%. 

The increase is a result of the guarantee on her policy; it is guaranteed renewable until age 80. This means that the insurance company is obligated to offer her coverage based on the same medical information as when the policy was originally written, even if she has developed Type II diabetes, terminal cancer or other health issues since the policy’s inception.

But if the woman maintained her health, she could apply for a new 20-year policy instead of renewing her old policy. This means that she would go through the underwriting process again. Provided that she is in good health, her cost for a$250,000 policy is instead $172.23 per month; a savings of almost $200 per month. The best part is that after applying for a new policy, if she is denied or given a worse rate, she can still accept the renewal rate of the original policy

Some of the uses of term insurance in the event of death include:

  • Covering your mortgage and other debts
  • Replacing your income and protecting your family’s lifestyle
  • Offsetting funeral costs and final medical expenses
  • Creating an education fund for your childrenPaying taxes on your estate so your assets pass fully intact to your loved ones

Term insurance is an economical solution. If you consider that life insurance saves your family from a financial burden at the worst possible moment in their lives, providing them the means to recover and move on, the cost may seem even less.