Term Life Insurance

By Dayna Noffke

  • Overview

    Life insurance is designed to provide financial compensation to survivors in the event of the death of the insured person. The two types of life insurance policies are whole life and term life. Although each has its own unique benefits, term life is an excellent option for many consumers, as it is the least expensive type of life insurance policy.
    Term Life Insurance
  • Definition

    Term life insurance is an affordable type of coverage that provides a cash benefit to the insured's designated beneficiaries in the event of her death. Term life policies are in effect for a given period, or term, generally of 1 to 30 years, during which premiums do not go up. At the end of the term the policy can be renewed, although the rate may increase. Term life insurance does not accrue cash value, but most insurers will allow policyholders to convert the policy to whole life coverage at the end of the term.
  • Benefits

    Term life insurance offers the financial security of whole life policies at substantially less expense, making it an excellent choice for young people, customers seeking supplemental or temporary insurance or those who are on a budget. Term insurance is the least complicated of life insurance policies because it does not accrue cash value. Because term life insurance locks in a premium for a specified length of time, the younger you are when you establish the policy, the more money you will save over the term. An additional benefit that some insurers offer is a "premium return" option on term life policies. With this feature, you pay more for the policy with the agreement that your premiums are returned to you at the end of the agreed-upon (usually 10-plus years) term. If the policy is canceled prior to the end of the term, the agreement is invalidated.

  • Considerations

    Rates for term life insurance policies are based upon age and health status, so the earlier a policy is begun, the more money the insured will save over the term of the coverage. Choosing a longer term will provide the most coverage for the least cost. If additional coverage is desired, it is possible to supplement the term life policy with whole life coverage as needed. Smokers and people with a history of health problems will pay the highest rates for insurance.
  • Expert Insight

    The experts as CNNMoney.com and consumer advocate Clark Howard both recommend term life policies as superior to whole life, noting that whole life is substantially more costly and the benefits do not match that cost. Whole life policies are more expensive not only because they carry an investment component but also have hefty built-in commissions added. CNN money experts point out that although these policies build cash value, there are also hefty surrender fees if and when you do decide to cash in your policy. Their recommendation is to keep your investment and your insurance policies separate by purchasing term life insurance rather than whole life.
  • Misconceptions

    Many consumers mistakenly believe that all insurance policies that provide equal amounts of coverage are the same in every respect. The truth is that because the policy is a legal contract between you and the insurer, you should carefully read the policy before you sign. Various provisions may be included in any policy and it is important that you are aware of them. For example, surrender fees (should you end a policy before the term is up) are common, as are clauses that exempt the company from paying benefits under specific conditions, such as if the insured commits suicide. Another common misconception is the belief that if you have a history of health problems, you will not be able to get an insurance policy. In reality, there is a policy for virtually every consumer, although it may involve more shopping around to find the right coverage if you have had serious health problems in the past. Being declined for coverage by one company does not mean that every company will decline you.
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