There are two chief types of life insurance policies: whole life insurance, which extends for the life of the policyholder, and term life insurance. As life insurance is a vital part to ensuring your dependents will have enough funds to cover expenses, such as funeral costs or even money for college tuition, in the event of your death. While it is a good idea to speak to a life insurance professional, knowing the basics of term life insurance can help you understand what will work best for you and your family.
Basics
Term life insurance policies are purchased for a specific amount of time--anywhere from one to 30 years--for a monetary amount of the person's choosing. If a person passes away during this time, the beneficiaries named on the policy will receive the face amount of the policy. For example, if a person has a five-year term life insurance policy in the amount of $50,000 and passes away during the years of coverage, then his beneficiaries will receive $50,000 to use toward any expenses. One consideration of a term life insurance policy is if a person does not pass away during the years of the policy, then the policy expires and no money is awarded.
Renewing
A term life insurance policy is often renewable should a person not pass away during the time period that was initially purchased. However, these extensions often are more expensive than the initial premiums associated with the term life insurance policy--though once you lock in the monthly payment for your insurance, the payment will stay the same over the life of the policy.
Term and Whole Life
The chief differences between term and whole life insurance has to do with time, cost and investment aspects. Term life insurance extends only for the agreed-upon time of the policy, while whole life insurance is for a person's entire life. Whole life insurance also is typically four to 15 times more expensive than term life insurance, according to SmartMoney.com. Lastly, whole life insurance features a savings component in which a person can build upon the amount initially invested, while a term life insurance policy is only valued at its agreed-upon rate.
Cost
The amount you will pay for a term life insurance policy depends on a number of factors, including the length of the policy and the policy's value. Other factors, such as a person's age or a pre-existing medical conditions, also may affect the policy's cost (in general terms, the more conditions or older the person, the more expensive the policy). Other lifestyle factors can affect the policy, such as smoking, history of alcohol abuse, a driving record or any hobbies that may put life at risk.
Considerations
A number of factors should be considered when purchasing a term life insurance policy. These include funeral and estate estimated expenses, and education, living or childcare expenses needed. Other items to consider are your existing assets, such as your current assets available, Social Security benefits and a surviving spouse's income. The idea is to leave behind enough funds to allow your dependents to maintain their lifestyles and provide for their education.
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