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5 Term assurance 5.1 Definition A term assurance provides a benefit on the death of the life assured provided it occurs within the term selected at outset. As the policy will not pay a benefit in every case as with endowment and whole life assurances, the cost is usually considerably cheaper. Term assurances do not normally have any benefit paid on early termination. Term assurances do not pay a benefit on maturity and so they are cheaper than endowment or whole life assurances for the same benefit levels. Question Term assurances do not normally have any benefit paid on early termination ie withdrawal because this would increase the risk of selective withdrawals, ie policyholders who believe they are healthy and so unlikely to receive the death benefit during the term may be more likely to surrender if they would receive a benefit on surrender. This would leave the insurer with a pool of lives with a higher than acceptable proportion in poor health. Also, term assurances have low premiums and low reserves as they do not pay a benefit in every case. Therefore, there is little scope to pay a worthwhile surrender value. 5.2 Use to meet customers needs If an individual takes out the contract, it provides protection against financial loss for the assureds dependants. If the contract is a decreasing term assurance contract then it may provide a lump sum on death, a lower amount being paid the later the death occurs in the contract term, or the contract may provide an income for the rest of the contract term. A decreasing term assurance can be used to meet two specific needs. First, it can be used to repay the balance outstanding under a repayment loan and, secondly, it can be used to provide an income for a family with children following the death of the income provider until such time as the latter can fend for themselves. 5.3 Existence of a group version The group equivalent of the term assurance contract can be used by an employer to provide a benefit to dependants on the death, whilst in employment, of an employee. There are also other uses for a group contract. For example it can also be used by a credit card company to provide a benefit on death equal to the balance outstanding on a credit card. Thus the insurance company in effect indemnifies the credit card company against the loss when a credit card balance is not repaid because of the death of the credit card holder. The benefit could be defined, for example, as the full amount outstanding on death, or as the average monthly balance over a period prior to death. Any supplier of goods with payment in instalments could use a term assurance to cover the risk that recovered goods are less valuable than the outstanding loan balances due on death.