What is term life insurance?

Term life insurance is the most common type of life insurance because of its affordability. It provides temporary coverage for a number of years depending on the buyer's specific needs. If the insured dies within that period, the insurer pays a lump sum to the beneficiary. But if the insured outlives the policy period, they don't get any money back.

Characteristics of Term Life Insurance

• Term life insurance is characterized by affordability: this is the major reason why so many young people opt for this type of life insurance. Premium rates increase proportionately as people get older.
• The period of protection can be one, five, ten or twenty years. At the end of the policy period the coverage expires if now renewed.
• Most term life policies are renewable. The coverage can be renewed at the end of the policy period without proof of insurability, with the premium increasing at each renewal, in accordance with the insured's age. This adverse selection against the insureds, makes many people, who are otherwise in good health, drop their term life policies.
• The majority of the term life insurance policies are convertible, i.e. they can be exchanged for a permanent policy at any given moment while the policy is in force, without proof of insurability. This is an important feature of term life insurance. However, many insurers have strict requirements about the application of this characteristic: some require that the conversion takes place within a given period of time, such as five years from the inception of the policy. The policyholder is also required to pay the difference in premiums between the two policies.
• Term life policies lack the cash value component of permanent policies, where money accumulates on a savings-account basis.
• Term life insurance does not provide any living benefits. The insurer only pays if the insured dies.

• Term vs. permanent life insurance – which should I choose if I am looking for long-term life insurance?
• Do I need to pay federal income tax on life insurance proceeds?
• What are they looking for in life insurance blood test?
• What are the advantages of a life insurance-funded buy-sell agreement?
• Whole life vs term life – what is the difference between term and whole life insurance?