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Choosing Term Insurance: Renewable, Fixed or Convertible? [Handy Guide]

Posted 1 June, 2017 by Clearly
in Technical Smechnical

You could be considering Term Insurance plans for various reasons.

It’s like you are part of the new crowd that wants to take charge of your finances. Eager to take an active hand in your investments – no boring Time Deposits –  that’s for sure. Which is why your personal mantra is: Buy Term and invest the difference.

Perhaps you are fresh to the workforce and new to the concept of Insurance. But you do want to dip your toe into the water and try out a policy. And Term insurance provides that avenue for testing and experience.

Or you just fancy Term plans for the no-frills, cost effective cover they provide.

Regardless of your motivation, this guide is meant to walk you through 3 features of different Term Plans so that you can make an informed decision – and choose correctly!

 

The Renewable Feature: Flexibility is key

 

Flexibility

For Dramatization purposes only. Do not try this at home. Or anywhere else for that matter.

 

A plan with a renewable feature lets you renew (duh) the policy once it expires, following the same tenure as the original.

An example would be a renewable Term Plan with a tenure of 5 years bought in 2015. When it expires in 2020, you will have the option to “rebuy” that plan with a fresh tenure of 5 years. Your health and medical condition will not be questioned unless you’ve already made a claim on the policy, or need to increase the coverage amount.

The renewability feature is coveted by people who prefer to keep their coverage options open and not commit to a longer period of time. In the early years, the premiums paid will generally be lower (because the Life Assured is younger. The Life Assured is the person the plan is protecting). But as the renewals continue, the premiums will spike as that person grows older.

In other words, you pay less now, but pay more later. And that increase can be contributed to 2 factors – increasing age and also increasing costs (inflation).

The tenure of renewable Term plans can vary greatly, from 1 – 5 years, to 10, 15, 20 and even 25 years. (The availability of longer tenured Term plans still baffle me to this day, but who am I to question the infinite wisdom of product development teams?)

 

Pros:

-Generally shorter period of commitment
-Option to renew as necessary
-Lower premiums paid especially when the Life Assured is young

Cons:

-Increases in policy cover (the sum assured) will require fresh underwriting, not ideal during the older years
-Premiums paid will continue to increase as the Life Assured ages
-Premiums are not guaranteed (locked in) and may spike drastically. The price of cover 10 years down the road may be exorbitant compared to today.

 

The Fixed Feature: Clarity and Surety of Commitment

 

Fixed Term Plans are those that lock in a (generally) longer time period of cover, without the option to renew. Why then would plans with the Fixed feature be bought at all?

The advantage lies in the long-term pricing offered by the fixed plan. Because the time frame is specified, the premiums are fixed throughout the whole tenure of the plan. Compared to renewable plans, fixed plans generally cost LESS when the cost is tallied up over a long period.

 

Fixed Vs Renewable

A graph speaks a thousand words. Note that initially, the premiums for Fixed Plans are higher than Renewable ones. But the total amount paid will be lower, after a number of years.

 

A fixed Term plan is great for those that already worked out their coverage requirements further in the future, and just want to lock in the premiums rates. It works wonders for those that just want to take care of their insurance needs once and for all, to free up their time for other things in life. (I fall under this category. Heading down to watch Wonder Woman after this, because I can)

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Pros:

– Lower Premiums overall
– No need to worry about underwriting concerns after plan is set in place

Cons:

– Higher Premiums paid in the earlier years
– Longer commitment period required to take advantage of the plan

 

The Convertible Feature: An Ace in your Sleeve

 

Convertibility

Again, for dramatization purposes. Convertibility features don’t look like this.

 

As the word suggests, the Convertible feature allows you to convert the existing Term plan you have into another type of Plan. Sort of like Transformers, but less cool and with more paperwork. :/

When I buy a Term plan that comes along with a Convertible feature, it allows me to convert it at a later period into a Whole Life Plan, should I so choose.

Do I need to exercise that option? Not really. But I consider it an ace up my sleeve, just in case I need it. But take note that conversion of the plan may come with underwriting, especially if there is Critical Illness cover involved.

 

Pros:
– Allows you to change into a Whole Life Plan later, without underwriting if the Sum Assured is unchanged or lowered.

Cons:
– Since it is an option, it does cost extra. But so far the difference will not break the bank, depending on the tenure. You can check out the differences using our Comparison Engine.
– There could be underwriting involved for plans that come with Critical Illness cover

 

Putting it all together

 

This guide is meant to highlight the differences between different features of Term plans so people can make a more informed decision. If you understand the benefits and drawbacks of each feature, great.

But at the heart of the matter, all Term Plans are really quite similar in their function – to provide a specific amount of cover for a specific amount of time, at the lowest possible cost. There isn’t a real need to analyse all the features to death before coming to a decision.

If he were alive, Confucius might say: Application is more important than Knowledge. But since he isn’t around, I shall state it on his behalf.

So by all means, arm yourself with this knowledge, but at the end of the day, do remember to take action. Drop us a note here or in the comments if you need extra help.

Until next time, stay cool. And stay protected, always.

 

www.ClearlySurely.com aims to eradicate the knowledge gap between consumers and Life Insurance. Our Vision is that one day, every Man, Woman, and Child will be properly insured.

    1. Clearly

      Thank you for your kind words! Hope that this article – and others that we write – will help you make an informed decision when it comes to Insurance matters

      Cheers!

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