Term insurance is a type of life insurance where the benefits are payable only during a specified period of time. The specified period for which the term insurance is in force can vary, be it one month, one year, or even five years.

Term insurance does not provide any returns beyond the stated benefit, unlike other insurance policies, which may come with a savings component that can be used for wealth accumulation.

But the basic benefit of insurance protection is still there. Depending on the purpose of getting the term protection, the claims payout received can be used to pay for family expenses such as education expenses or mortgages.

Because term insurance has a simple, no frills approach, policyholders pay less in terms of premiums, compared to other types of insurance which offer protection in addition to other features. The idea behind term insurance is that the savings from the lower premiums can be channelled towards investments separately, hence the phrase 'buy term and invest the rest.'

Despite this, term insurance is often overlooked, maybe due to the fallacy that 'it is a waste of money', as there is no cash benefits for the policyholder to claim once the term is over.

Having just described term insurance plans as a plain vanilla form of protection, it may be odd for us to talk about the different types of term insurance available, but in no way does the concept get complicated. Rather, the different types are designed more to suit the individual protection needs and means of policyholders. We highlight some below:

• Level term

This is the most common type of term insurance. Level term insurance policies can be purchased for specified durations of 5 years, 10 years, 15 years and so on (it depends on the policyholder's age and purpose when buying the policy). Most companies will not sell term insurance if the term ends past the applicant's 80th birthday.

The key feature for this type of term plan is that the death benefit and premiums remains “level” or the same for the entire duration of the policy.

For instance, OCBC Bank's latest term insurance plan, MaxTerm, offers protection for Death, Total and Permanent Disability1 (TPD) and Terminal Illness2. The sum assured is paid in a lump sum in the event of death or should the life assured suffer from TPD or terminal illness during the duration of the policy term.

MaxTerm lets you enjoy high protection at a lower premium. For a 30-year-old (based on age nearest birthday) male, non-smoker taking up a 30-year coverage of $200,000 sum assured, the annual premium is only $478 or just $41.35 a month throughout the whole policy term.

• Decreasing term

For this type of plans, the death benefit decreases gradually over the duration of the policy, while the premium remains the same and eventually hits zero by the end of premium term.

Decreasing term policies are often recommended to policyholders with mortgages. The remaining amount owed on a mortgage can be paid off by the payout if the insured dies during the period. However, the policy has no maturity value if the policyholder survives beyond the end of the plan.

Take for example, the Mortgage Protector plan offered by OCBC Bank. This is a regular premium reducing term insurance plan. It offers protection for Death and TPD. The sum assured reduces monthly according to the term and effective interest rate set at the inception of the policy. For a 30-year-old (based on age nearest birthday) male, non-smoker taking up a 30-year coverage of $500,000 sum assured and at an interest rate of 4 per cent, the annual premium is only $527 or just $45.59 a month. What's more, he only needs to pay for 22 years of premium to enjoy the 30 years coverage.

• Convertible

Term life insurance policies may have an option for you to convert the policy to a whole life insurance while they are in force.

Most life insurance companies include a clause in the policy which allows you to convert your term policy to a permanent policy within a specific period of time.

This option is useful especially when you bought the term insurance at a time when your financial situation was tight (but now it is more stable). It is also particularly attractive if you happen to have developed some health conditions during the duration of the term insurance, and are now unable to purchase additional life insurance.

If you have a term life insurance policy which includes a conversion privilege and your policy is still within the period allowed, you may convert it to a permanent policy, even though you may not be able to qualify under normal conditions.

¹ Upon TPD of the life assured, the basic sum assured is payable in one lump sum and the policy terminates. Coverage is from policy inception to before policy anniversary on which life assured’s age nearest birthday is 66 years.

² Upon the conclusive diagnosis of an illness that is expected to result in the death of the life assured within 12 months, the basic sum assured is payable in one lump sum and the policy terminates. This diagnosis must be supported by a specialist and confirmed by the Company’s appointed doctor. Terminal illness in the presence of HIV infection is excluded.

Gone are the days where term insurance was recommended to males only, as women these days make an equal contribution to the family income.

Couples are more aware these days that upon the death of one partner, it may be difficult for the surviving partner to maintain the same standard of living for the family. Therefore, both husband and wife may consider buying their own respective term insurance policies as a means of ensuring that their children can live in the same house and go to the same school or have sufficient funds for college when the time comes.

It is for this reason that single parents who do not have the luxury of double income to run their households or pay their bills should also consider term insurance. It is an affordable means of ensuring their children are financially taken care of in the event of the parent's untimely death.

Individuals with jobs that occasionally require them to take risks, such as reporters who need to travel to war-torn countries for news, are ideal for term insurance as well.

Adults who have just started working and do not have enough finances should also consider term insurance protection, rather than waiting until they are more settled. A study by the Life Insurance Association in 2007 had estimated the protection needs of the average working adult at 11.3 times their average annual income of $42,427. However, the estimated existing cover of $118,639 is equivalent to only 2.8 times this average annual income, or a mere 25 per cent of the average working adult's protection needs.

Some of this shortfall in insurance protection can be made up for through term insurance, an affordable means to enjoy the protection you need at different life stages.