What is Term Life Insurance?

Definition

Term Life Insurance is a type of life insurance that guarantees payment of a death benefit to a beneficiary if the covered person dies during the specified term. Once the term expires, the policyholder can either try to renew it, convert it to a permanent policy, or allow the term policy to terminate. Terms usually last anywhere from a year to 30 years.

How does it Work?

When you purchase a term life insurance policy, the insurance company determines the premiums based on the death benefit or payout you requested as well as your age, gender, and health. They can also look into your medical records, current and past medications, hobbies, family history and whether or not you use tobacco products.

If you die during the term of the policy, the insurance company will pay the face value or death benefit of the policy. If the term expires before your death, there is no payout.

Pros of Term Life Insurance

Because term life policies offer a benefit for a restricted amount of time, it is usually the least costly life insurance available. It is very attractive to young people with children or who know they want to start a family. These people can obtain large amounts of coverage for low costs and can insure that their spouse or children can get through the next few years without huge amounts of debt.

Cons of Term Life Insurance

The main con of a term life insurance policy is the end of the term. Think of it like paying insurance for your car. You pay the same premium every month and if you get into an accident, the policy will kick into play and payout. But if you never get in an accident, you still pay the same premium no matter what. So, for a term life policy, if you do not pass away during the specified term then you get no payout and you do not get any of the premiums you paid back.