What is Term Life Insurance?
Term life insurance is the simplest form of life insurance, and thus the least expensive to buy. While most types of life insurance include some sort of investment vehicle or cash-value option, term life insurance is purely risk protection. Another example of pure risk protection insurance is auto insurance. Your auto insurance protects you and your money from risks that can happen on the road. Term life insurance works in the same way. The only difference is the only risk covered with life insurance is death, and instead of paying for repairs, your insurance pays the sum of the money to your beneficiary.
How Term Life Insurance Works
Term life insurance is designed to provide a death benefit to your beneficiary if you die within the length of time (the term) that you specified when you purchased the policy. As long as you are current on your payments, if you die within the term that was set when you bought the policy, your beneficiary will receive the full death benefit. Although very similar, there are three different types of term life insurance you can buy.
Level Term Life Insurance Policy
Level term life insurance is probably the most common type of term life insurance. With level term life insurance, the premium you pay each year is guaranteed to remain the same for the entire length of the term. The most common term lengths are 10, 15, 20, and 30 years. For example, if you purchased a level term life insurance policy today with a term of 20 years, and death benefit of ,000, and a rate of a year, that rate would be guaranteed never to increase for that entire 20 year period as long as you stayed current on the payments.
Annually Renewable Term Life Insurance Policy
With annually renewable term life insurance, your policy is guaranteed to be renewed every year for a specified length of time (the term you choose) as long as you continue to pay on the policy. With each renewal year, however, the premium you pay for the policy can be adjusted, and typically increases. At each annual renewal, you have the option to accept and continue your insurance, or to discontinue. As long as you decide to continue, the insurance company is obligated to cover you, as long as the term is not up. For example, if your term is 30 years, as long as you continue paying your premium every year, the insurance company must honor the policy up to the 30 years. After that, the policy ends.
Convertible Term Life Insurance Policy
Convertible term life insurance works the same way that level term life insurance works; your yearly premium is guaranteed to remain the same for the duration of the term. Convertible term life insurance can, however, be converted at any time into a cash-value policy and be switched from a term policy to a policy of another type. This is beneficial because if you are diagnosed with a serious illness during your term, but survive the policy, you may be unable to obtain a new life insurance policy once your term expires. Once you convert your policy from a term policy to a cash-value policy, however, adjustments are made to how much premium you pay for the policy.