Term Life Insurance
Term life insurance policies are a traditional insurance product whereby the insured makes fixed payments over a certain period of time (the ‘term’), in exchange for life insurance coverage. If the insured party dies at any point during the duration of the term, the death benefit of the policy is paid to the beneficiary stipulated in the policy contract. If the term expires prior to the insured’s death, coverage at previous rates is no longer guaranteed, and the insured must negotiate new terms of coverage, or forgo coverage entirely. Hence, it is unlike products such as whole life insurance.
Term life insurance is best suited for situations where an individual wishes to provide income replacement to the beneficiary. As with most other sorts of insurance, the insurance will satisfy claims against it, provided that the premiums are paid on time and the contract is still in effect.
The most basic form of this type of insurance is renewed according to annual terms, however, it is very uncommon for an individual to take out a policy for only one year. Annual renewable term, or ART insurance, allows the insured to take out coverage in one-year increments, but provides a guaranteed ability to renew for a certain number of years – generally between 10 and 30 years. However, this entails a slightly higher premium that would be paid for single-year coverage. As such, most individuals purchase level term life insurance in increments of 10, 15, 20, and 30 years.
Insurers may offer the option to convert a term life policy into a universal or whole life policy, depending on the insurability of the insured. This is useful for individuals that would no longer derive as much financial benefit from purchasing a new term life policy.
Term insurance uses the same mortality tables as other sorts of insurance to determine premium payments. The death benefit that is ultimately paid out is tax free, in the event that it is ever paid out – it is estimated that a low as 1% of term life policies actually end up paying a death benefit. This is due to a variety of factors, but mostly because of the sort of people that purchase term life insurance – families looking to provide for children in the event of the death of a wage-earning parent. Term life insurance is by far the most affordable insurance in this type of situation; its low premiums make it quite attractive to younger families and buyers.
Buying term life insurance should always be an informed decision. Be sure to consider that in the event that the term of the life insurance expires, yet the insured has not died – that the policy results in a net loss of the investment. However, the death benefit might exceed the amount paid into the policy depending on when the insured dies – the policy is certainly a two-way street. Regardless, unlike other forms of insurance that refund premiums or can be used as investment vehicles – there is no payoff when a term life policy expires. As such, this sort of insurance often has people wondering if they are wasting their money.