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Term life insurance is often defined as temporary coverage because it only lasts for a limited number of years. Although lifelong coverage may sound more appealing, there are many advantages to term life worth considering. It’s 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. For example, if you want life insurance to replace your income, a term life policy can cover your salary during your earning years. After that time, you may no longer need coverage.
Definition of term life insurance
Term life is the simplest type of life insurance. It covers you for a set number of years, such as 10 or 20. 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 a mortgage. Term life does not build cash value, an investment component common in permanent coverage. This is one of the reasons term life is the cheapest type of life insurance.
Term life insurance policy definitions
Get a better understanding of how term life insurance works and the meaning behind common features by reading the following definitions.
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 expire after 20 years. At that point, you may have the option to extend your coverage or convert it to a permanent policy.
Riders. Life insurance riders can be added to both term and permanent policies. They act as additional coverage for either 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.
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.
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.
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.
Annual renewable term life. 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.
More about term life insurance
Learn more about term life insurance and find the best policy for you.