Starting a family? Caring for aging parents? If you have dependents counting on your income, life insurance is more a necessity than a luxury.
For families and other people seeking a particular period of coverage, a term life insurance policy helps provide financial security without requiring a lifetime of premiums. Here's how it works.
Coverage and benefit
A term life insurance policy provides coverage for a specific period of time, or term. The owner chooses a policy for a stated term and pays scheduled premiums to the insurer during that time. If the insured person passes away while the policy is in force, the policy's beneficiary receives the stated value of the death benefit. If the insured person survives the term, no benefit is paid.
Length of term
A term life coverage period may be as short as 1 year or as long as 30 years. Some of the most common terms are 5, 10, 15, and 20 years. (Available terms will vary, based on the age and health of the person insured.)
As a term ends, many policies give the policyholder the right to continue the coverage. This is called the right of renewal. The renewal term may be as short as one year or as long as the original term.
Most companies also allow term life policies to be converted to a permanent policy, such as whole life or universal life. Permanent policies are designed to provide coverage for the life of the insured person, not just a stated term. New premiums and other conditions may apply.
Term life premiums are determined by a number of factors, including the age, health, tobacco use, and occupation of the insured person, as well as the length of term and stated death benefit. For example, it will typically cost less to insure a 30-year-old nonsmoker in good health for a 20-year term and a $200,000 death benefit than it will to provide the same policy to a 45-year-old smoker with ongoing health issues.
The policyholder usually pays level premiums for the duration of the term. However, every time the policy is renewed, the premiums can increase to reflect the age of the policyholder. Renewing the policy for the maximum available term, which is the length of the original policy term, can help stabilize the premiums. In some cases, the insurer may require a new medical examination prior to renewal, which could result in even larger premium increases or exclusion.
Other financial benefits
Unlike permanent life policies, term life policies do not provide a cash value component. The premiums paid to the insurer are simply the nonrefundable price of coverage for the stated term.
One partial exception is a return of premium (ROP) term policy. If the insured person survives to the end of an ROP policy's term, the insurer refunds the total amount of the premiums paid. In some cases, the policyholder may even withdraw a percentage of the premiums before the end of the term.
Term life is a sound insurance option for people seeking to provide for their dependents for a set period of time. For more information about whether term life is right for you, be sure to discuss your needs with an insurance professional.
Because insurance protection is a contract, any coverage descriptions in this article are general only and are not statements of contract. All coverages are subject to all policy provisions, including applicable endorsements.