Term Life Insurance Definition
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Term life insurance is designed to cover your financial obligations if you die unexpectedly.
A term life policy is a relatively affordable life insurance option that works for most people.
Coverage lasts for a set amount of time, usually from 10 to 30 years.
Term life insurance is temporary coverage because it lasts for a limited number of years only. Although lifelong coverage may sound more appealing, there are many advantages to term life insurance worth considering.
A term policy tends to be cheaper than permanent life insurance, plus the shorter coverage is typically sufficient for most people. That’s because life insurance is designed to provide a safety net to anyone who relies on you financially, which may only be for a set period of time.
If you want life insurance to replace your income, a term life policy can cover your salary during your earning years. After that, you may no longer need coverage.
Term life insurance definition
Term life is the simplest type of life insurance. It covers you for a set number of years. If you die within the term of the policy, your life insurance beneficiaries receive a death benefit. You can typically buy term life insurance in 1-, 5-, 10-, 15-, 20-, 25- or 30-year increments.
The length of your term life policy should match your longest financial obligation, such as your mortgage. Term life doesn't build cash value, an investment component common in permanent coverage. This is one of the reasons term life is often the cheapest type of life insurance.
Term life insurance policy definitions
Learning about common insurance features and phrases can help you better understand how term life insurance works.
Term length. This refers to the number of years the policy is in effect. For example, if you buy a 20-year term, the policy will typically expire after 20 years. At that point, you may have the option to extend coverage or convert it to a permanent policy.
Death benefit. The life insurance death benefit is the payout your beneficiaries receive if you die while the policy is active. The amount of money paid out is tied to the face amount of your policy. For example, if you buy a $500,000 term life policy, your beneficiaries will get $500,000 when you die.
Beneficiary. A life insurance beneficiary is the person or entity that receives the death benefit from your policy. This is often a family member, such as a spouse, but can also be a trust or charitable organization.
Premium. A life insurance premium is the payment you make to keep your policy active. Most insurers allow you to pay premiums on a monthly, quarterly, semiannually or yearly basis.
Riders. Life insurance riders can be added to term and permanent policies. They act as additional coverage for the policyholder or another person. For example, when you buy term life coverage for yourself, you may be able to add a rider that covers your spouse as well.
Underwriting. Life insurance underwriting is a review process where insurers determine your eligibility for coverage and set premiums based on risk. For most term life insurance policies, underwriting involves a questionnaire about your health and lifestyle along with a medical exam.
Types of term life insurance
There are several types of term life insurance to choose from, including:
Annual renewable term life insurance. This type of policy covers you for one year, with the option to renew after the year is up. Premiums typically increase after each renewal, making annual renewable term life advisable only if you have a short-term need for coverage.
Convertible term life insurance. A convertible term life insurance policy allows you to upgrade a term life policy. This gives you flexibility to take advantage of lower premiums for term life insurance with the option to convert the policy to permanent life insurance later on without taking a new medical exam.
Decreasing term life insurance. This type of policy has a decreasing death benefit and is often used to cover a specific debt like a mortgage. As you pay down the debt, the life insurance face value also decreases. Decreasing term life is typically cheaper than level term life due to the diminishing death benefit.
Group term life insurance. Many employers offer free or subsidized group life insurance policies that last as long as an employee stays with the company. The death benefit is often equal to one or two years of an employee’s salary.
Guaranteed issue. A type of no medical exam life insurance, guaranteed issue life insurance skips the questionnaire and medical exam. While this may be a good option if you otherwise wouldn’t qualify for life insurance due to age or health issues, coverage is typically capped at low amounts. Guaranteed issue policies tend to be expensive, since insurers issue coverage without any underwriting.
Level term life insurance. This type of policy has a fixed death benefit. The coverage amount you buy at the start of a level term life policy doesn’t change, and your beneficiaries receive the full amount if you die during the term.
Return-of-premium term life insurance. A return-of-premium life insurance policy refunds all or part of the premiums you paid if you outlive your term. It’s usually more expensive than a regular term policy.
Same-day coverage. Due to its simplicity, you can often buy instant term life insurance online. In some cases, coverage can start the same day.
Voluntary term life insurance. Also known as supplemental coverage, voluntary term life insurance is an additional policy you can buy to enhance group life insurance. In some cases, you can carry your voluntary term life insurance policy if you change employers.
More about term life insurance
Go beyond term life insurance definitions to find the best policy for you.
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