Short-term vs long-term life insurance policies
Much like a spare house key stashed under a flowerpot or carrying some emergency pain medication in your bag, life insurance is one of those things that you may be very glad of having, because it can help protect your family’s finances.
But do you really need it? If anyone relies on your income for financial support, then the answer could be ‘yes’. And, when you consider that chronic diseases are becoming more common in people aged 45 and older, it could be a good idea to have it ticking over in the background, in case something does happen to you.
But what type of life insurance do you need? Is a term life insurance policy with an expiration date going to be enough, or should you consider a life insurance policy that doesn’t have an expiration date (one that’s guaranteed renewable)? It’s the million-dollar question, and because life insurance products can differ quite a bit, as does every individual’s needs, it’s important to make sure you choose the right one for your needs.
Let’s take a look at these two types of life insurance policies, and the pros and cons of each.
What's short term life insurance?
In most cases, short term life insurance covers you for a defined period of time or until a certain age, at which time cover expires. You can choose a ‘death benefit’ which is the cover amount you’d want to be paid out in the event of your death, and you’ll pay a premium each month to your insurer in return.
The ‘term’ bit refers to the fact that the policy usually provides cover for a fixed term—such as 10, 20, or 30 years, or it could expire when you reach a certain age that’s set by your insurer. Some have a terminal illness diagnosis benefit in which, if you happen to develop a terminal illness during the term of the policy, it’ll pay out upon diagnosis (usually with a 12 or 24 month life expectancy). With this money, you’ll have the funds paid to you, so you can make decisions for your family or pay medical expenses.
Or, if you were to unexpectedly die during the term of the policy, it’d pay out the benefit to your loved ones (or another nominated beneficiary), and the money can be used to help support them financially.
Because the length of cover is only for a fixed term, if you die or get diagnosed with a terminal illness outside of that term, generally, it means you won’t receive a payout or a refund of premiums paid, after the policy has expired.
What’s long-term life insurance?
While technically also a ‘term’ life insurance policy, this type of policy is typically one that’s ongoing for your whole life (guaranteed renewable provided your premiums are paid when due), or expires at age 99, depending on the policy you choose. Unlike a short-term life insurance policy as explained above, a long-term policy only ends when you die or claim for a terminal illness benefit (unless the policy is cancelled). This type of policy typically pays out for terminal illness or premature death, but they may also offer additional optional cover such as children’s insurance, total and permanent disability cover (TPD), or serious illness cover (trauma cover or critical illness cover).
If you decide to add TPD to your life insurance policy, you’re covered if you were to become totally and permanently disabled and can no longer do your job or any job, depending on the insurer’s definition of TPD. TPD may be an additional optional cover or included with some policies automatically, so make sure you read and understand the PDS.
Children's insurance provides a payout benefit in the event that the insured child suffers death by any cause, including a terminal illness, and other specified serious illnesses. These will vary based on the particular policy you choose, but typically the cover is for blindness, cancer, chronic kidney failure, deafness, encephalitis, major head trauma, or severe burns. Check the PDS as cover may vary per insurer and policy.
Serious illness insurance
Serious illness insurance provides a benefit in the event that the policy holder suffers a specific condition, as listed in the policy’s PDS. Examples of these might be a heart attack, stroke, cancer, or coronary artery bypass surgery. Sometimes there are exclusions that won’t be covered like certain types of cancer, or if your condition is a result of self-infliction.
The pros and cons of each
Not sure which one to go for? Let’s break it down so you can weigh up the options.
Pros and cons of short-term life insurance with an expiration date
- It’s a relatively low amount of cover which could be a good option if you only want a basic policy.
- It’s typically cheaper than a standard life insurance policy.
- It’s often a simpler and faster application process.
- It’s only for a fixed term so if you outlive your policy term, you generally won’t receive a payout or a refund of premiums.
- If you outlive your policy term, it can feel as if you’ve lost money on the premiums you’ve paid.
- It’s generally not very flexible so you’re limited if you want to make changes to your policy.
Pros and cons of long-term life insurance that’s guaranteed renewable
- It covers you for life or until age 99 for some policies (though some options/extras like TPD and serious illness do expire once you reach a certain age).
- It may have a higher cover amount available which can be useful if you want your mortgage or other larger debts to be paid out or for your family to maintain a certain standard of living.
- It can require a more thorough application process (more health and lifestyle questions, possible blood tests or medicals, depending on the insurer).
Which one is the right one?
Everyone’s circumstances are different, and you need to consider which cover will suit your needs best. If you’re a little older and your kids have flown the nest, you may just be after a lower-cost policy that will boost your partner’s income and help them cover things like travel, the kids’ weddings, or other expenses if you died, so a short term life insurance policy could be suitable for you.
On the flip side, if you’re still working your way up the career ladder, raising young kids, and have a family who relies heavily on your income, a long term life insurance policy with a higher limit of cover, guaranteed renewal and additional options available may suit better. This type of policy can cost more but can also be more flexible in terms of what covers can be added to it, and because it may offer a higher level of cover, it can help pay out large debts like a mortgage so it’s one less thing a family needs to worry about.
Essential policy checklist
Before you take out a life insurance policy, it’s important to check the following closely:
- What’s covered and what isn’t (including medical conditions and pre-existing conditions you may have)
- Whether the amount of cover you choose suits your family’s needs now and into the future
- Additional benefits or features of the policy
- How flexible the policy is (in case you want to make changes in the future or if your circumstances change)
- Any waiting periods before you’re able to make a claim
- What the premiums will cost you now and in the future.
Ensure you consider your own needs, lifestyle, circumstances, and medical history when choosing the right policy.
Plan for the unexpected, just in case
Tomorrow is never guaranteed so it’s important to plan for the future in case something unexpected happens to you. A life insurance policy can help give you peace of mind, knowing you have a financial plan in place for your family in case life took a turn for the worst.
Doing your research about the life insurance policies out there can help you decide which one will suit you and your circumstances—whether that’s a term life insurance policy with an expiration date or something that lasts a little longer. As always, make sure you consult a professional when it comes to making decisions about your finances.
Are you still not sure about which type of life insurance may work best for you? Find out more information here or if you’d like to compare different life insurance policies, we can help with that too!
27 Oct 2020