What is Term Life Insurance?
What does term life insurance mean? I get this question often. With the various life insurance policies available, it can seem daunting to shop for life insurance.
Term life insurance or term assurance is life insurance that provides coverage at a fixed rate of payments for a limited period of time (the relevant term). After that period expires, coverage at the previous rate of premiums is no longer guaranteed and the client must either forgo coverage or potentially obtain further coverage with different payments or conditions.
If the life insured dies during the term, the death benefit will be paid to the beneficiary. Term insurance is the least expensive way to purchase a substantial death benefit on a coverage amount per premium dollar basis over a specific period of time.
Many young people with large obligations and lower incomes tend to choose term life insurance to buy coverage for new mortgages, student loan obligations, and other large financial burdens.
Term life insurance Explained
Considered the original form of life insurance and can be contrasted to permanent life insurance such as whole life, universal life, and variable universal life, which guarantee coverage at fixed premiums for the lifetime of the covered individual. Term insurance is not generally used for estate planning needs or charitable giving strategies but is used for pure income replacement needs for an individual.
Term insurance functions in a manner similar to most other types of insurance in that it satisfies claims against what is insured if the premiums are up to date and the contract has not expired, and does not provide for a return of premium dollars if no claims are filed. As an example, auto insurance will satisfy claims against the insured in the event of an accident and a homeowner policy will satisfy claims against the home if it is damaged or destroyed by, for example, a fire. Whether or not these events will occur is uncertain. If the policyholder discontinues coverage because he has sold the insured car or home, the insurance company will not refund the premium. This is purely risk protection.
What is Term Life Insurance Used For?
Because term life insurance is a pure death benefit, its primary use is to provide coverage of financial responsibilities for the insured or his or her beneficiaries. Such responsibilities may include, but are not limited to, consumer debt, dependent care, university education for dependents, funeral costs, and mortgages. Term life insurance may be chosen in favor of permanent life insurance because term insurance is usually much less expensive (depending on the length of the term), even if the applicant is an everyday smoker.
For example, an individual might choose to obtain a policy whose term expires near his or her retirement age based on the premise that, by the time the individual retires, he or she would have amassed sufficient funds in retirement savings to provide financial security for the claims.
This type of policies can be purchased for periods of 10, 20 or 30 years at level premiums. Probably the most concerning consequence of a term policy is that at later years your health is not as perfect to buy a new term or even be unable to buy it at all.
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