What is term insurance?
Term insurance is a type of life insurance policy that provides coverage for a certain period of time, or a specified "term" of years. If the insured dies during the time period specified in the policy and the policy is active, or in force, then a death benefit will be paid.
Term insurance is initially much less expensive when compared to permanent life insurance. Unlike most types of permanent insurance, term insurance has no cash value.
Level Term Policies
There are many different types of term insurance policies available. Many policies offer level premiums for the duration of the policy, such as 10, 20 or 30 years. These are often referred to as "level term" policies. While premiums for these level term policies remain level for a set number of years, after this time period the premium increases significantly, making the policy cost prohibitive.
Most term policies have a built-in privilege to convert to a permanent policy regardless of any changes in the insured's health. (To learn more about term insurance, read: Life Insurance: Putting a Price on Peace of Mind.)
Really good question! Term is a type of life insurance that provides a potential death benefit for a fixed period or "term." This is commonly a flat premium for say, 5, 10, 15, 20, or 30 years. After the end of the term the policy no longer provides a death benefit. The other common characteristic of term life is there is generally no cash accumulation, which helps keep the cost relatively low. Term is often characterized as temporary insurance. (There is also annual renewable term "ART" where premium increases each year--that is not popular with consumers, and is usually found as part of an employee benefit plan.) I hope that answer helps!
Think of Term Insurance and Life Insurance that covers for you for a specific amount of time. For example, you have a large 30 year mortgage. You may want to get life insurance to make sure your significant other and kids are okay if something were to happen to you. You would get life insurance to cover the “term” of the mortgage.
There is a myth that term life insurance is cheaper than other options. While true “term” may cost less in the short term, it will cost more in the long term (assuming you don’t die right away), and actually very few term policies ever pay out. The insurance companies can make them so cheap in the short term because they expect that very few people will pass away before they abandon coverage.
Think of it as cost versus value- you pay less, but if all goes well, you will be alive, but get nothing back from your premiums paid in over the years.
All the best,
Term insurance is the cheapest way to get a guaranteed life insurance benefit for a defined amount of time. It has two design features which make it attractive this way:
1. A contractual guarantee on both the premium and the survivor benefit for a defined amount of years (10-15-20-25-or 30 years, depending on the company, the age of the insured, and other factors).
2. No capability of accumulating cash inside the policy. You can't pay an extra premium to get extra benefit; you can’t transfer money from other accounts into the policy, and the carrier will not pay dividends or apply interest to your account.
This product is ideal for covering yourself for a single need, for a specific amount of time. These could include indemnifying a mortgage or business loan, meeting the obligations of a divorce decree, or bridging the gap until life insurance is no longer necessary. The kicker, of course, is that if you outlive this time, and still for whatever reason need coverage, then term insurance could become extremely costly. The price typically increases astronomically after the guarantee period.
If you are considering buying term, give some thought as to whether you still might need coverage longer than you anticipate. If so, then you might want to go with a permanent product and lock into rates for the long term.
Feel free to contact me with additional questions.
Generally there are two types of insurance, Term and Permanent.
Term is coverage for a specific period time (such as 1, 5, 10, 20 or 30 years). It is usually just pure insurance, meaning there is usually no cash value build up/ benefit inside the policy, just a death benefit. There are many variations and time limits on policies, but I like to think of term insurance as for a specific reason with a defined time line, ensure payoff of mortgage, funding education, debt payoff, budget restrictions, lump sum for a purpose. etc.
Depending on the amount of coverage, you will most likely be required to take a physical/medical exam, the insurance company will possibly request your medical records from your physician(s)/ health providers and undergo an underwriting process by the insurance company. Once approved your coverage will be in effect as long as you pay your premium until the policy term expires.
Term is normally less costly than permanent insurance. I also suggest shopping insurance companies since costs can vary between companies.
Term life insurance is a policy that will build no cash value, is relatively inexpensive, and will have a level premium for a period of years. (10, 15, or 20 years most common) Very simple, if you pay the premium on time, the death benefit is in-force. It is commonly used for traditional family situations whereby debts and income replacement could equal a large death benefit need but funds to pay for it are usually minimal. Also, if the traditional family has the need say for 15 or 20 years only, the term insurance will fit the need nicely.
Whole life insurance is the other "type" of insurance and basically is the opposite. It costs more, builds cash value, and is usually a long term need for the client. Hopefully that helps!
Jason R. Tate, ChFC, CLU, CASL