What is Term Life Insurance?

By Christina Hamlett

  • Overview

    What is Term Life Insurance?
    Contemplating one's mortality usually doesn't rank high on the list of favorite topics. The reality is that in the aftermath of death, those who are left behind can subsequently be faced with financial hardship, including the potential loss of their home, if adequate provisions for life insurance haven't been made. There are several different kinds of policies available. This article provides an overview of what term life insurance is all about.
  • Definition

    The operative word in this type of insurance policy is "term." Specifically, individuals pay a premium on a monthly basis which provides coverage for a specific length of time (i.e., five years). When the time period is up, the individual can either renew the original policy or take the money that he has been paying and go do something else with it. Should the individual die during the term, the face value of the policy is paid as a lump sum death benefit to the named beneficiary. If, however, the policy holder doesn't renew his insurance before he dies, the beneficiary will not receive anything. Term life is the simplest form of insurance coverage and also the least expensive to purchase. With the exception of suicide within the first two years of purchasing a policy, a lump sum is paid whether the cause of death was natural or the result of an accident.
  • Eligibility

    For individuals in good health who have not yet reached their 50th birthday, term life insurance is economically priced. In most cases, a medical exam isn't required for someone to be eligible although purchasers do need to fill out a short questionnaire. (As one gets older, the premiums get more expensive and proof of good health can be mandatory.) One of the challenges that arises, of course, is if the policy holder contracts a terminal illness sometime during the initial period of coverage. Once the original policy expires, the holder will be considered uninsurable from that point on. There are two ways around this dilemma. The first is the fact that term life insurance can be acquired for a maximum period of 30 years. Though obviously no one can predict what the future holds, an individual who takes out a policy while he is in good health at age 48 and discovers a year later he has inoperable cancer is more likely to die before that 30 years is up. The other route is to obtain a term life insurance policy that has a guaranteed reinsurability clause. This means that the holder can continue to renew the policy without having to prove eligibility.

  • Cost

    Purchasers can either choose a payment plan in which the premium stays the same from month to month for the duration of the term or pay a higher premium each time the policy is renewed for a new term (the latter being a factor of age and/or increased operating costs of the insurance company. The amount of the monthly premium automatically deducted from one's checking account is based on the amount of coverage the individual wants to have. Families with young children, for instance, are generally going to want a higher coverage amount than an individual who is single. In recent years, there have also been more companies providing low-cost (i.e., $12 a month) term insurance to senior citizens, the primary reason being that people are living a lot longer than they used to. In concert with low-cost premiums for older purchasers is an accidental death benefit in which the policy's full value would be paid to beneficiaries even if the holder was killed after only the first month the policy was purchased.
  • Disadvantages

    A term life insurance policy is strictly based on the value of the policy at the time the holder expires. Both the maximum limit of the policy and the amount to be paid to the beneficiary are the same. For example, a $100,000 term life policy isn't going to accrue any interest over the holder's lifetime; it will simply be $100,000. Further, if the holder defaults on the monthly premiums due to economic hardship or accidentally forgets to renew it and dies a week later, all of those payments will be forfeited. Unlike a whole life (or permanent life) policy which provides more flexibility and a tax-deferred accumulation of cash, term life doesn't allow you to withdraw money from the policy in order to address any financial crisis you experience while you're still alive.
  • Expert Insight

    While a qualified insurance agent can walk you through the process and identify the best type of policy to fit your financial circumstances and your future plans to protect your loved ones, it also pays to do some homework on your own so you'll know what kinds of questions to ask. Here are some excellent resources to add to your bookshelf: "Questions and Answers on Life Insurance: The Life Insurance Toolbook" by Anthony Steuer; "Insurance for Dummies" by Jack Hungelmann; "Tools and Techniques of Life Insurance Planning" by Stephan R. Leimberg, Jr.; "Life Insurance for the American Family: Most of What You Know About Life Insurance is Wrong" by Ed Kelly; " The Life Insurance Handbook" by Louis S. Shuntich.
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