What Is a Term Life Insurance Plan?

The major and most important reason for buying life insurance is to protect others who rely on your income in the event of your death. This situation is particularly relevant when there are growing children in the family. This protection can range from replacing income to paying off a mortgage or other large debt. Sometimes a small amount of life insurance is bought when there are no longer people dependent upon your income simply to take care of last expenses. For these types of need, the cheapest insurance that can be purchased from a reliable company is the best. This form of life insurance is called Term insurance.

As the name suggests, term insurance provides protection for a specified length of time, usually in 5, 10 or longer year periods. Most term insurance is renewable at the end of a term up to a certain age, which typically is 80 years or longer but may vary from company to company. The premium during each term stays the same, but at each renewal is very likely to increase based on the insurance company's experience. However, it can never increase more than what is stated in the initial policy. Many insurance companies will allow the holder of term insurance to convert to a fixed premium, whole life insurance up to a certain age.

Term insurance premiums can be very low for quite large amounts of coverage at an early age. As the person ages, the premiums may become less affordable. For example, based on quotes from one company in 2009, a 30-year old male could pay $300 a year for $250,000 of life insurance for the first 5 years. As the rates increase with each renewal, by the time this person reaches 70, the annual premium might be $12,000. A whole life policy on the same person, where the premiums stay the same over the life of the individual, might cost $2,500 a year. The whole life policy would have built a cash-value that could be tapped at any time. The whole life policy acts as a form of investment. This investment, though, typically grows less than an investment in a mutual fund over the long haul.

Term life gives financial protection to dependents when it is needed at a very low cost. As children age, as retirement resources are built up, particularly if the spouse is also working and building savings, the financial need for insurance decreases. People could easily reach a point much later in life where the entire insurance coverage was no longer necessary. Sometimes even a different form of term insurance may be better---a type called Decreasing Term. In this case, the total amount of coverage decreases over a pre-set number of years, for example, 20 years. This might be a good choice for a couple who simply wanted to provide a financial cushion until their children were grown.

Whatever type of life insurance is purchased, it will be one the buyer will want to keep for at least 20 years or much longer. Because of this, choosing an insurance company with a long and sound track record is critical. While insurance companies do fail, at least the buyer should start off with a highly rated organization. A starting place to check ratings is Standard & Poor's ratings. Public libraries often buy a set of reference books from another company named AM Best, which provide financial background on insurance companies. Online sources provide much the same information, and the companies that are being considered should provide information as well. However, any such information should be current, that is, no more than 6 months old.