Loading the player...

What is 'Term Life Insurance'

Term insurance is a policy with a set duration limit on the coverage period. Once the policy is expired, it is up to the policy owner to decide whether to renew the term life insurance policy or to let the coverage end. This type of insurance policy contrasts with permanent life insurance, in which duration extends until the policy owner reaches 100 years of age (i.e. death).

BREAKING DOWN 'Term Life Insurance'

These types of policies provide a stated benefit upon the death of the policy owner, provided that the death occurs within a specific time period. However, the policy does not provide any returns beyond the stated benefit, unlike permanent life insurance policies, which have a savings component that can be used for wealth accumulation.

Term life insurance is also known as pure life insurance because its only purpose is to insure individuals against the loss of life. Premiums for term life insurance are based solely on a person’s age, health and the life insurer’s determination of life expectancy. If the person dies within the specified term, the insurer pays a death benefit to the designated beneficiary. If the term expires before death, no death benefit. Policyholders may be able renew a term policy at its expiration, but their premiums will be based on their attained age.

Term insurance is best suited for people who know for certain their need for life insurance coverage will be temporary — in other words, they feel their surviving family members will no longer have a need for the extra protection life insurance provides or that they will have accumulated enough liquid assets to self-insure.

Types of Term Life Insurance

Level Term: Level term life insurance provides the insured with coverage for a specified period of time, typically 10, 15, 20, 25 or 30 years. The premium is calculated based on the age and health of the insured. The insurer levels out the premium payments by charging more at the beginning of the policy than mortality costs require, so the premium payments are fixed and guaranteed for the term.

Yearly Renewable Term: A yearly renewable term (YRT) policy has no specified term and is renewable every year without evidence of insurability. The premiums on a YRT policy start off low and increase each year because they are based on the insured’s attained age. Although there is no specified term with a YRT policy, premiums can become prohibitively expense for those at later ages, making it difficult to maintain.

Deceasing Term: A decreasing term policy features a death benefit that declines each year according to a predetermined schedule. The insured pays a fixed, level premium for the duration to the policy. Decreasing term policies are often used in concert with a mortgage loan to match the coverage with the declining principal of the loan.

RELATED TERMS
  1. Variable Life Insurance Policy

    A form of permanent life insurance, Variable life insurance provides ...
  2. Annual Renewable Term (ART) Insurance

    A form of term life insurance that offers a guarantee of future ...
  3. Whole Life Insurance Policy

    A life insurance contract with level premiums that has both an ...
  4. Level-Premium Insurance

    A type of term life insurance for which the premiums remain the ...
  5. Key Person Insurance

    A life insurance policy that a company purchases on a key executive's ...
  6. Permanent Life Insurance

    An umbrella term for life insurance plans that do not expire ...
Related Articles
  1. Financial Advisor

    Advising FAs: Explaining Life Insurance to a Client

    Life insurance was initially designed to protect the income of families, particularly young families in the wealth accumulation phase, in the event of the head of household's death.
  2. Financial Advisor

    Buying a Life Insurance Policy? Read This First

    Knowing who needs life insurance, how it works and the different types of insurance can help consumers make informed decisions about this product.
  3. Insurance

    Life Insurance: putting a Price on Peace of Mind

    Would your death leave loved ones financially stranded? Find out how to ease your mind and keep them protected.
  4. Insurance

    Whole or Term Life Insurance: Which Is Better?

    Learn the difference between term life insurance and whole life insurance. Understand when it is beneficial to buy each type of life insurance.
  5. Insurance

    4 Reasons Why Waiting To Buy Life Insurance Is a Bad Idea

    Understand the benefits of applying for and securing life insurance coverage while you are young and healthy, and learn the cost of waiting to get coverage.
  6. Insurance

    3 Reasons to Avoid Term Insurance

    Find out the reasons why term life insurance may not be for everybody, and why you may want to avoid it in favor of a permanent life insurance policy.
  7. Financial Advisor

    7 Issues to Consider When Determining Life Insurance Coverage

    Seven issues to consider when buying life insurance to ensure the coverage is tailored to meet your personal financial situation.
  8. Financial Advisor

    Permanent Life Policies: Whole Vs. Universal

    If you're looking for life-long security, choosing between these two is the key.
  9. Insurance

    4 Things That Keep You From Getting Life Insurance

    We look at four common reasons people give for not applying for life insurance, and see if they're legitimate.
  10. Insurance

    The Best Type Of Life Insurance For You Right Now

    Different stages of life call for different amounts of life insurance coverage. Find out what you need, when and why.
Hot Definitions
  1. Agency Theory

    A supposition that explains the relationship between principals and agents in business. Agency theory is concerned with resolving ...
  2. Treasury Bill - T-Bill

    A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations ...
  3. Index

    A statistical measure of change in an economy or a securities market. In the case of financial markets, an index is a hypothetical ...
  4. Return on Market Value of Equity - ROME

    Return on market value of equity (ROME) is a comparative measure typically used by analysts to identify companies that generate ...
  5. Majority Shareholder

    A person or entity that owns more than 50% of a company's outstanding shares. The majority shareholder is often the founder ...
  6. Competitive Advantage

    An advantage that a firm has over its competitors, allowing it to generate greater sales or margins and/or retain more customers ...
Trading Center