Term Life Insurance

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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.

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