Term Life Insurance

Term life insurance is designed to provide protection for a limited period of time, which is the term of the policy. However, if the insured does not die during the term that the policy is in force, the face value nor premium are refunded. Term insurance, therefore, provides death protection only; it offers no living benefits such as the guaranteed cash value of whole life insurance. Term insurance is used to provide economical coverage at times in the life of the owner when it may be more advantageous to have additional coverage.

Some term policies are renewable, which means that the policy can be renewed at the end of the term for a similar period without the insured having to show evidence of insurability. Evidence of insurability generally consists of a medical exam or doctor’s statement regarding the insured’s satisfactory health status (in other words, no physical examination is required). The premium of the renewal is based on the insured’s age at the time of the renewal. Term policies may also be convertible; convertibility allows the policy owner to convert the temporary protection of a term policy to permanent protection (usually in the form of whole life insurance) without evidence of insurability.

Term policies are defined by the way their face values change during the life of the policy. A level term policy’s face value and premium remain the same throughout the policy’s term. Considering a 5-year term policy for $50,000, for example, both the face value and the premium remain constant during the entire 5-year period.

The face value of a decreasing term policy decreases throughout the life of the policy down to zero at the date of policy expiration. The premium remains the same. Decreasing term is commonly used to cover a home mortgage. The value decreases at the same rate as the loan balance; thus, if the insured were to die, the mortgage would be paid off.

Increasing term insurance is the opposite of decreasing term: the face value increases over the life of the policy, while the premium remains the same. This type of term insurance is not used nearly as often as level- or decreasing term.

Because term insurance is temporary protection, it’s often used to cover temporary needs, such as debts. Other advantages are its initial low cost, making it suitable for people with a large need for insurance but with limited financial resources. Term insurance can also be flexible; it can be used to provide additional protection for the insured. Needs and responsibilities change throughout a person’s life; term polices can be used to cover those needs when they are at hand.

Of course, there are some disadvantages to term insurance, as well. Over a long period of time, renewable term insurance will become very expensive. This is because, although initially low, the premium of each renewal will increase based on the increased age of the insured. For decreasing term policies, although the premium remains the same, it pays for less and less actual coverage throughout the life of the policy. As previously stated, term insurance offers no benefits other than pure death protection. And even though policies can be renewable, they generally will not be renewed beyond 70 years of age, at the time when life insurance is needed most.