Term life insurance is simply life insurance with a finite time period. You purchase a term policy with either 10, 15, 20, 25 or 30 year terms. The premium is level throughout the whole term and at the end of the term, you have the option to renew the coverage annually up to a certain age (varies by insurance company). Most term life insurance policies also have an option to convert to a permanent policy (up to a specific age established by each insurance company).
The main benefit of term insurance is the cost. Term life insurance typically has significantly lower premiums than permanent policies because, while a permanent policy’s death benefit is guaranteed for life (no matter how long it is), a term policy will only pay the death benefit if the insured person passes away during the term period.
Unlike permanent policies, term life insurance does not accumulate any cash value. It offers pure insurance coverage, similar to home owner’s insurance or automobile insurance. If your house or car don’t sustain any damage, the policy will not pay nor will you get your premiums back if there are no claims. Term life insurance works the same way – if you pass away, your beneficiaries will receive the death benefit. If you outlive the term of your policy, no benefits will be paid and you will not receive the premiums back.
Life insurance is often viewed as income replacement for a family’s breadwinner, should he/she pass away during his/her working years. Therefore, when purchasing term life insurance, we recommend taking out a policy that insures the breadwinner’s working years. As an example, if you are 35 years old and expect to work until you’re 65, it would be wise to purchase a 30 year term policy. If you are in good health, purchasing the longest term possible locks in the premiums for the length of the term. If you were to purchase only a 10 year term policy with the idea that you would purchase a new 10 year term policy at the end of the first term, you are at risk of paying much higher rates for the next policy, due to age and change in health status.