Term Life Insurance 101
Term life insurance is a basic, no frills type of life insurance. It is a life insurance for a specified duration limit, or time. You buy a specific amount of coverage for a specific time period by signing a contract. You pay for that coverage period and at the end of the term the policy expires. For example, the term might be until retirement, or until children are grown, or until college is paid for.
Term life insurance is the least expensive available insurance policy and allows you to spend a lot less and use the extra money in a better investment. It does not build up cash value and the premium normally increases as the policy owner gets older. Usually term life insurance covers a specific term such as term of 1year, term of 20 years or term of 30 years.
If you die while the policy is active, term life insurance provides a stated benefit for it; and your survivors will be paid the agreed upon amount. However, the policy does not provide any returns beyond the stated benefit and once the policy expires, the insurance coverage ceases and the insurance company keeps the money. Some term insurance policies give you the right to renew at the same rate for multiple years, while others do not. The former are generally a bit more expensive.
Term life insurance is most suitable for you, if you are:
- in need of coverage for a limited period of time,
- young and looking for lower premiums,
- buying a home or car, where the financial burden of a loan will disappear in time.
Term life insurance policies must be renewed when each term ends. Before buying a term life insurance policy, you should ask about the renewal provisions for the protection of your future insurability. There are some typical choices:
- Annual Renewable - the premium goes up each year.
- Level Term - the premium stays the same for specific period like 5, 10, 15, or 20 years, then increases sharply.
- Automatic Renewable - you will have to pay more for this feature.
Some other options on term life insurance policies may include: Re-Entry which may offer a lower premium than an automatically renewable policy. You can renew at lower rates offered to new customers; but you will also have to undergo a new physical examination and pass other verification checks. If you have developed any health problems, your premium could go up and cost more than an automatic renewable policy. Convertible term gives you the option to convert to a whole life insurance policy in later years.