Term life insurance is a type of life insurance that provides coverage for a specified period, usually between 10 and 30 years. If the insured person dies during the policy term, the insurance company pays a death benefit to the named beneficiaries.
Unlike permanent life insurance, term life insurance provides protection for a limited period and generally does not build cash value. Because of its temporary coverage, it is usually more affordable than permanent life insurance.
How Does Term Life Insurance Work?
When purchasing a term life insurance policy, the insurer assesses several factors to determine the policyholder's premium. These factors may include:
- Age
- Health condition
- Medical history
- Lifestyle and habits
- Occupation
- Coverage amount
- Length of the policy term
Depending on the insurer and policy, the applicant may be required to undergo a medical examination.
Generally, older applicants and people with certain health conditions may pay higher premiums than younger and healthier applicants. People who engage in certain higher-risk habits, such as smoking, may also pay higher premiums.
A premium is the amount paid to an insurance company in exchange for insurance coverage.
What Happens When the Policyholder Dies During the Term?
If the insured person dies while the term life insurance policy is active, the insurer generally pays the agreed death benefit to the policy's beneficiaries, subject to the policy's terms and conditions.
For example, if someone purchases a 20-year term life insurance policy with a $100,000 death benefit and dies during the 20-year coverage period, the beneficiaries may receive the $100,000 death benefit, assuming the policy is active and the claim is covered.
What Happens If You Outlive the Policy?
If the policyholder survives the entire term, the coverage normally ends when the policy expires. Under a standard term life insurance policy, premiums are generally not refunded.
However, some policies offer a return of premium feature. With this type of policy, eligible premiums may be returned if the policyholder survives the term, subject to the policy's conditions.
Can Term Life Insurance Be Renewed?
Many term life insurance policies provide an option to renew coverage when the original term ends. However, renewal terms and conditions vary between insurers and policies.
If the policy is renewed, the premium may increase because the policyholder is older. Depending on the policy, a new medical examination may or may not be required.
Before purchasing a policy, it is important to check whether it includes a renewal option and how premiums are calculated after renewal.
Can Term Life Insurance Be Converted to Permanent Life Insurance?
Some term life insurance policies are convertible, meaning the policyholder can convert the term policy into a permanent life insurance policy without purchasing an entirely new policy.
The conversion rules vary by insurer. For example, there may be a specific period during which conversion is allowed, and the policy may limit which permanent insurance products are available.
Convertible term life insurance can be useful for people who want temporary protection now but may need permanent coverage in the future.
Types of Term Life Insurance
There are several types of term life insurance. Common types include:
- Level term life insurance
- Increasing term life insurance
- Decreasing term life insurance
- Annual renewable term life insurance
- Convertible term life insurance
- Return of premium term life insurance
- Group term life insurance
1. Level Term Life Insurance
Level term life insurance provides a fixed death benefit throughout the policy term. The premium may also remain level throughout the agreed term, depending on the policy.
For example, a person may purchase a 20-year policy with a $100,000 death benefit and pay the agreed premium throughout the 20-year period.
Level term insurance is one of the most common forms of term life insurance.
2. Increasing Term Life Insurance
Increasing term life insurance is a policy in which the death benefit increases over time, according to the policy terms.
The purpose of increasing coverage may be to help the death benefit keep pace with factors such as inflation or increasing financial needs.
Because the coverage amount increases, premiums may also increase depending on the policy.
3. Decreasing Term Life Insurance
Decreasing term life insurance provides a death benefit that gradually decreases during the policy term.
It is commonly associated with financial obligations whose balance decreases over time, such as certain loans or mortgages.
For example, if a person's outstanding loan decreases each year, a decreasing term policy may be designed to provide coverage that broadly corresponds with the remaining debt.
4. Annual Renewable Term Life Insurance
Annual renewable term life insurance is a type of term insurance that can be renewed each year, subject to the policy's terms.
It is also known as yearly renewable term insurance.
The premium generally increases as the insured person gets older because the risk of death increases with age.
Annual renewable term insurance may be suitable for people who need short-term protection and want the flexibility to renew coverage annually.
5. Convertible Term Life Insurance
Convertible term life insurance allows a policyholder to convert a term life insurance policy into a permanent life insurance policy, subject to the terms and conditions of the policy.
One advantage of a conversion option is that the policyholder may not have to go through the same underwriting process required when purchasing a completely new policy. However, conversion rules vary, so policyholders should review their policy carefully.
6. Return of Premium Term Life Insurance
Return of premium term life insurance is a type of term insurance that may return eligible premiums to the policyholder if they survive the policy term.
For example, if a policyholder pays premiums for the entire term and remains alive when the policy expires, the policy may return some or all eligible premiums according to its terms.
Because of this additional feature, return of premium policies are generally more expensive than traditional term life insurance.
7. Group Term Life Insurance
Group term life insurance provides coverage to a group of people under one policy. It is commonly offered by employers as part of an employee benefits package.
The employer may pay some or all of the premium, depending on the benefits arrangement.
Group life insurance can provide employees with life insurance protection without requiring them to purchase an individual policy themselves.
Does Term Life Insurance Have Cash Value?
Generally, term life insurance does not have cash value.
This means that a standard term life insurance policy does not accumulate a savings or investment component that the policyholder can normally access while the policy is active.
People who specifically want a life insurance policy that can build cash value generally look at certain types of permanent life insurance, although these policies are typically more complex and expensive than term insurance.
Advantages of Term Life Insurance
Term life insurance has several advantages, including:
1. It Is Generally Affordable
One of the main advantages of term life insurance is its relatively low cost compared with many forms of permanent life insurance.
2. It Provides Financial Protection
The death benefit can help beneficiaries manage financial responsibilities after the death of the insured person. Depending on their needs, beneficiaries may use the money for expenses such as living costs, education, debts, or other financial obligations.
3. Different Coverage Periods Are Available
Policyholders can often choose a term that matches their financial needs, such as 10, 20, or 30 years, depending on the insurer and available products.
4. Some Policies Can Be Renewed
Many term policies provide renewal options, allowing policyholders to continue coverage after the initial term, although premiums may increase.
5. Some Policies Offer Conversion Options
Convertible term insurance can allow policyholders to move from temporary coverage to permanent life insurance without purchasing an entirely new policy, subject to the policy's rules.
Disadvantages of Term Life Insurance
Despite its advantages, term life insurance also has some limitations.
1. It Usually Does Not Build Cash Value
Unlike certain permanent life insurance policies, standard term life insurance generally does not accumulate cash value.
2. Coverage Is Temporary
Term insurance only provides protection for the specified period. If the policy expires and is not renewed, coverage ends.
3. Premiums May Increase After Renewal
If a policy is renewed, the premium may increase because the insured person is older.
4. Premiums Are Usually Not Refunded
With a standard term life insurance policy, surviving the entire term generally does not result in a refund of premiums. Return of premium policies are an exception, subject to their specific terms.
Term Life Insurance vs. Permanent Life Insurance
The main difference between term and permanent life insurance is the length and structure of coverage.
| Feature | Term Life Insurance | Permanent Life Insurance |
|---|---|---|
| Coverage period | Limited period | Generally lifelong, if conditions are met |
| Cost | Generally lower | Generally higher |
| Cash value | Usually none | Some policies build cash value |
| Death benefit | Paid if death occurs during the covered term | Generally paid when the insured dies, subject to policy terms |
| Renewal | May be available | Generally not applicable in the same way |
| Conversion | Available with some policies | Not applicable |
Who Should Consider Term Life Insurance?
Term life insurance may be suitable for people who want affordable financial protection for a specific period.
For example, someone may want coverage while:
- Raising children
- Paying a mortgage or other major debt
- Building financial security
- Replacing income for their family
- Supporting children's education
- Running a business with financial obligations
The appropriate amount and duration of coverage depend on an individual's financial circumstances and goals.
Conclusion
Term life insurance provides financial protection for a specific period and is generally more affordable than permanent life insurance. It can provide a death benefit to beneficiaries if the insured person dies while the policy is active.
There are several types of term life insurance, including level term, increasing term, decreasing term, annual renewable term, convertible term, return of premium term, and group term insurance.
Before purchasing a policy, it is important to compare the coverage period, premiums, exclusions, renewal provisions, conversion options, and other policy conditions. Insurance products differ between companies and countries, so prospective policyholders should carefully review the terms of the specific policy they are considering.