What is term life insurance?

What is Term Life Insurance?

Term life insurance is a contract between you and an insurance company for predetermined amount of time, such as 10, 20, or 30 years. If you were die during the term length of the policy your beneficiaries would receive a death benefit.

When the term of the contract ends you will no longer be covered under most term policies and will need to apply for coverage again. You may have the option to renew your term policy or convert it to permanent coverage (at a higher premium).While this may be seen as a potential drawback, term policies are typically much cheaper than permanent life insurance and therefore could make a lot of sense for your situation depending on your specific needs.

It is important to note that term life insurance does not build a cash value that you could use or borrow against in the way that whole life insurance does. And if you do not die during the term of the policy you often do not get your premiums back unless you add that option to your plan, at an additional premium. With that said, term life is often a good option for life insurance shoppers because you receive the most amount of coverage at the least amount of premium.

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A term life policy may be a good option for you if:

• You need a lot of coverage for the lowest price
• You need to pay off large debts like a mortgage or sending your children to college
• Income replacement

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Things to consider when buying a term policy

How much coverage do I need?

One of the most important factors to consider when buying life insurance is the financial impact your death would have on your family. If you are the breadwinner in the household you may want to consider how long you would need to replace your income for your family.

Even if you are not the breadwinner in a two person household, both incomes are often needed to make ends meet. You may not need as much coverage as your breadwinning partner, but ensuring your income can be replaced for a time would relieve your family of a great financial burden.

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Can I qualify? - Qualifying for life insurance coverage revolves around a number of factors but the most important factors are:

• Age - The younger your are, the lower your premiums will be. This is because younger people are much less likely to die in the short term.
• Health - Although medical tests are largely unnecessary to qualify for life insurance, your health does matter. Most carriers have a simple application process that will ask a number of health questions to gauge your relative health. Poorer health typically results in higher premium requirements.
• Gender - Men tend to die at younger ages than women, so men generally pay higher premiums for the same amount of coverage.

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Types of term life policies

Level-premium term - This is one of the most common types of term life insurance. It is the best choice for most people because it is simple to understand and easy to use. The premiums and face amount of the policy stay the same throughout the life of the contract. This plan type provides a great benefit for the family of the insured because large expenses, like a mortgage, tend to decrease over time, leaving more of the death benefit for income replacement or other financial needs.

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Renewable term - This plan types allows you to choose to sign up for another term after your initial term policy ends even if your current state of health would cause you to be declined for a different policy elsewhere. It is important to note that your premiums would increase because you would be older. This type of term policy could make sense if you had a short term insurance need.

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Decreasing term - These policies tend to have level premiums a death benefit that gradually decreases over the life of the contract. Mortgage protection is a common example of decreasing term life policy. You may choose this specific type of coverage to cover a debt that you plan to pay off over the life of the policy.

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Whether you're planning to replace your income or protect your home, term life insurance can be an incredibly useful financial tool. It is simple, easy to understand, and even customizable to fit your specific needs. It is not a financial cure all, but it can go a long way towards protecting when tragedy strikes. If you like the idea of term life but would like to explore other coverage options, check out: Intro to Whole Life Insurance.

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