Term life insurance
Insurance paying a lump sum if the insured dies before a set date, and nothing if the insured survives; with no savings element, it has no surrender value and costs little per unit of cover.
Term life insurance is the purest form of life insurance: it covers one risk and nothing else. If the insured dies during the policy term, the beneficiary receives the benefit; if the insured survives to maturity, the policy lapses and the premiums are earned by the insurer. With no savings built up, the policy has no surrender value. This is what makes it cheap per unit of cover: a healthy forty-year-old can insure several hundred thousand euros for a few tens of euros a month. It is used to protect a family during the period when it depends on an income, to secure a loan, the main purpose of loan protection insurance, or to protect a company against the loss of an executive. The premium may be annual and rising with age, or level over the whole term, which creates a reserve since the insured overpays early and underpays late. Pricing rests on mortality tables and medical underwriting, and the product is sensitive to adverse selection: those who know they are ill are the most eager buyers, and those who stay healthy lapse to buy cheaper elsewhere. In the US market, the equivalent product, term life, is the backbone of household protection.
Hypothetical case: a 38-year-old parent takes out 300,000 euros of term cover over twenty years, at a level premium of 28 euros a month. If the parent dies at 50, the children receive 300,000 euros; if the parent reaches 58, the policy ends without paying anything.
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