Term life insurance, because it does not build up a cash value, is the simplest and least expensive life insurance available. It is easy to understand and provides a high level of financial security without charging a large premium. Term life insurance offers temporary protection for people who are on a budget.
Functions and Uses
Term life insurance is purchased to protect the financial future of your beneficiaries, usually your loved ones. Your beneficiaries can use the death benefits to pay final expenses, including funeral costs and medical bills, to pay off a mortgage, to build an estate or to pay estate taxes.
Length
The basic term life insurance policy is designed to expire before you die. The policy is written for a set amount of time, usually 10, 20 or 30 years. If you outlive the stipulated time period, the insurance company will not pay any death benefits to your beneficiaries. If you die within the stipulated time period, the insurance company will pay your beneficiaries the face amount of your policy. Term life insurance is not permanent life insurance and you could pay policy premiums for 10, 20 or 30 years and never receive a dime in return.
Cost
Because basic term life insurance does not build up a cash value, you can purchase a large among of coverage for a low amount of money. This policy is designed for someone on a budget who needs life insurance for a temporary time period.
Types of Policies
There are three basic types of life insurance: level term, decreasing term and annual renewable term. The death benefit and the premium remain the same on a level term policy throughout the life of the policy. A decreasing term life insurance policy has a death benefit that decreases over time but the premium remains the same. This type of policy is generally less expensive than level term mortgage and is comparable to mortgage insurance offered by most banks. An annual renewable term policy is renewed each year; the death benefit remains the same but the premium may increase. These policies are typically purchased by young individuals who are just starting out and don't have a lot of money to invest up front.
Convertibility
Most basic term life insurance policies are convertible to a certain age. This feature allows you to convert your existing term life insurance policy into a permanent life insurance policy without producing proof on insurability. This is especially beneficial if you have experienced any health problems since you purchased your original policy.
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