Term life insurance definition: the basics

This guide on term life insurance definition can help you learn about how it works and the many advantages of getting a term policy. Read on to get the basics on plan types, who term life insurance can benefit the most, and how to buy a policy.

Term life insurance definition

Term life insurance plans provide death benefits for a specific length of time, usually between 5-30 years, as long as the plan is kept active. If you pass away with an active policy, your beneficiaries receive the benefit amount you selected. Term life insurance plans are less expensive than whole or universal life plans, but they do not have value after your coverage period ends. They also have no investment potential.

How term insurance works

1. Choose a term and benefit amount. First, you’ll need to pick a specific term (the period of time you want coverage) and death benefit (the amount of money your beneficiaries will receive upon your death). When making these selections, consider your current debts, financial goals, and funeral expectations.
2. Pick your beneficiary. Your insurance company needs to know who to pay if you die within your coverage period. You can select one or multiple beneficiaries, and you can also select both people and organizations to receive the benefit amount.
3. Take a medical exam or answer health questions. As a part of the application process, you will have to go through underwriting. This can be as little as a health questionnaire and as much as a medical exam with lab work. If you are in good health and young, your premiums will usually be lower.
4. Pay premiums. Once your plan has been approved and made active, you must keep up with your monthly payments (premiums) to keep your coverage. As long as your policy is active when you die, your beneficiary will receive a death benefit payout.

Types of term insurance

The types of term life insurance plans you may encounter when trying to choose a plan include level, decreasing, renewable, and ‘return of premium.’

• Level means that the death benefit stays the same throughout the length of the policy. Common types of level plans include annual-renewable terms; 5-year renewable terms; 10-, 15-, 20-, 25-, and 30-year terms; and terms up to a specified age (usually around 65, but this will be detailed in your policy documents).
• Decreasing means that the death benefit decreases over the length of the policy.
• Renewable means that the plan can be renewed for additional terms up to a certain age, like 80 years old. The premium may change with each renewal, usually increasing with age.
• ‘Return of premium’ means that if you haven’t used your life insurance policy by the end of the term, a certain amount of your premium payments can be refunded. These plans tend to have higher premiums than other policies in exchange for the potential refund.

Why get term life insurance?

It’s easy. Term insurance is easy to shop for, and you can compare prices from different insurance companies based on only benefit levels and term periods.

It’s affordable.: Term insurance usually provides the most death benefit per dollar when compared to permanent life insurance. For instance, if you have a term policy and a permanent policy with the same death benefit of $500,000, you usually will pay less in premiums for the term policy. This is because term policies don’t provide the ability to build cash value the way you can with permanent insurance.

It can be renewable. If you have a renewable term plan, you can renew your policy for additional terms up to a certain age. Although premiums typically increase each time you renew because you are getting older, you may not have to go through additional underwriting again.

It can be convertible. Some term policies are designed so that you can convert them to a permanent life insurance policy. (Insurance companies might require that you do this before you turn a certain age.) By converting to permanent insurance, you get the benefit of having a policy that could last your entire lifetime. In addition, it could build cash value.

How to buy term life insurance

You can buy term life insurance by contacting multiple life insurance companies, getting multiple quotes from each, and comparing costs. Alternatively, you can contact a licensed insurance agent to do that for you. An agent can get quotes from available life insurance plans, help you compare coverage and costs, and even help you with the application process. You can reach out to an agent by calling (800) 827-9990, or you can find a licensed insurance agent near you.