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.
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