What Is Term Life Insurance And How Does It Work?

Term life insurance is the simplest form of life insurance because it is strictly defined as a death benefit. Unlike whole life insurance, there is no investment component to worry about, and the policy only lasts as long as the time period for which it was purchased.

You can buy a term life insurance policy for any length of time, whether one year or 40 years, and it is the least expensive option. It is extremely popular among young professionals who don’t want to worry about managing an investment portfolio but want some security.

When you purchase term life insurance, you are usually given a monthly premium that does not change over the life of the policy, according to Investopedia. You decide the term for which you want the policy to be active, and you decide how much insurance to purchase.

The amount of insurance you buy with a term life policy is the amount that is paid out in death benefits. There is no accumulation of funds as you would see with a whole or universal life policy because there is no investment component to manage. If the insured person passes away before the term expires, his or her beneficiaries receive the value of the policy.

If a term life insurance policy expires before the named insured dies, he or she can decide to renew the policy or retire it. Renewals generally mean a re-negotiation of terms, which means you won’t necessarily get the same premium rates you had before. However, you can keep the policy active that way.

Term life insurance is not an investment. There are no rates of return to consider, no funds to evaluate, and many people feel that it is a waste of money because it does not benefit the insured or the beneficiary beyond the life of the policy. With whole life, you can use the accumulated wealth to help supplement your retirement or for any other purpose.

However, the cost discrepancy is considerable, and many people cannot afford whole life policies. Term life insurance is a more manageable expense that will provide for one’s family after his or her death. This is the reason this option is so popular.

The general rule of thumb is to buy sufficient term life insurance to cover your dependents as long as they are living with you or to cover your family until you begin to receive retirement income. In other words, you might consider buying a term life policy that will last until you turn 65, or whatever age you intend to retire.

Remember, however, that premiums increase as you tack more years on the term. Insurance companies assume that you are less likely to die in one year than in 20, for example, so they’re going to charge you more for the additional risk.

The best way to buy term life insurance or life insurance for family is to consult with a financial adviser first. They are skilled at identifying deficiencies in your financial situation and helping you structure life insurance policies to fill your needs.