How to choose duration of a temporary cover

For many insurance policyholders, making a choice on the duration of a term life, also referred to as a temporary insurance cover, is often a hard puzzle to crack.

Reason? Given that a term insurance cover only provides benefits to the dependants upon the death within the specified period contained in the policy, any survival means the insured will not be eligible to receive any payments from the insurance company.

What does one consider when choosing the duration of the cover given that timing of death in its unique nature is uncertain?

Term insurance covers should be taken for two major reasons:

First, as a measure to safeguard an ongoing financial goal from any interruption that would be caused by a financial loss due to the death of the significant participant. In this case, the cover is taken within the period when the insured is pursuing the goal.

For instance, if you have taken a mortgage of Sh10 million with a repayment period running for five years, you would need a cover to safeguard your family or estate from foreclosure for the five years should you die before clearing the repayment.

Without a cover, your financier would have to sell your home to recover their loan before they can pass proceeds to your estate. This is what is referred to as foreclosure.

To safeguard your family, you would need to take a temporary cover that would run concurrently as you continue to repay your mortgage. Then the benefits paid to your family will go towards the repayment of the mortgage loan and the extra proceeds for their daily upkeep.

When you have school-going children whom you pay school fees for, you can get a temporary cover that would run until they finish their education.
The duration of the policy will, therefore, be determined by the number of years your children have to completing their education.

Again, you could be transferred to work in a foreign country for a number of years or you could decide to go overseas to pursue education. During this time, you will need some cover for the duration you will be there undertaking your projects or study.

Sometimes due to limited global or regional representation of insurance companies, you may not be able to get one particular insurance company that provides coverage in many countries.

This means that you cannot transfer your cover to your new country of work or back to your home country upon the end of the contract. The nature of your cover would, therefore, be temporary and only provide coverage for the time you plan to carry out your contract.

The second factor that would influence one to take a term cover is to create time for one to prepare either financially or socially. Perhaps you are single and planning to get married in the next couple of years after which you start a family.

During this time you would need to be under some insurance cover albeit temporary. The duration of this temporary cover would be dictated by the length of your preparation for marriage. Upon marriage you would need to take up a joint life insurance as a couple.

Usually when you take up a joint life insurance policy, you will be expected to pay lower premium than if you take separate covers. This is because in joint covers, the risk is spread and probability of occurrence is minimal.

On financial grounds, it could be that you have landed in an unstable job and need adequate time to prepare to take up a whole life insurance cover and at the moment you can only afford to stash little cash for premiums.

Since term insurance coverage is the cheapest form of cover given that it has no cash value, it would provide the best option for one looking for an affordable cover.

The duration of the cover will then be influenced by the length of one’s financial preparation before taking a whole life insurance. Thus you need to consider your main need or drive for the cover before picking on your preferred duration for a temporary cover.

Mr Opiyo is training manager and coach. Email: [email protected]