What is term life insurance
Term life insurance is the simplest -- and usually the cheapest -- form of life insurance. Term life provides protection for a specific period of time. It pays a benefit only if you die during the term. If you are living the policy expires without value. It is sometimes called temporary life insurance.
Policies generally last for 1, 5, 10, 15, or 20 years, or to some specified age such as age 65 or age 100.
Some policies can be renewed when you reach the end of the term. The premium rates increase at each renewal date. Many policies require that you present evidence of insurability at renewal to qualify for lower rates.
Some policies are convertible. They guarantee the right to switch or "convert" to one of the company's whole or permanent life policies. Conversion rights usually guarantee that you will be accepted for the whole life policy regardless of your health when you convert. But the whole life policy you switch to could be very expensive.
Term Insurance Advantages
- Initial premiums generally are lower than those for permanent insurance, allowing you to buy higher levels of coverage at a younger age when the need for protection often is greatest.
- It's good for covering needs that will disappear in time, such as mortgages or car loans.
Term Insurance Disadvantages
- Premiums increase as you grow older.
- Coverage may terminate at the end of the term or become too expensive to continue.
- The policy generally doesn't offer cash value or paid-up insurance.
Types of Term Life Insurance
There are three major types of term life insurance.
Level
Level term life insurance provides a death benefit that stays the same over the period. For example, a 5-year level policy with $10,000 in coverage means the company will pay $10,000 if you die any time during the 5 years the policy is in effect. Premiums normally stay the same ("level") during the term.
Decreasing
Decreasing term life insurance provides a death benefit that decreases over the life of the policy in a specified manner. For example, the benefit during the first year of a 5-year decreasing term policy may be $10,000, and decrease by $2,000 every year. At the end of the fifth year, the face value is zero and coverage expires. Premiums for decreasing term usually remain level.
Increasing
Increasing term life insurance provides a death benefit that increases over the term in a specified manner. For example, the benefit for a 5-year increasing term policy may have a face amount that starts at $10,000 and then increases 5% every policy anniversary date. Or the coverage may be tied to increases in the cost of living as measured by a standard index. Premiums usually increase with the coverage in this type of policy.
Tip: Insurance agents are sometimes reluctant to sell term insurance. This may be because they think term insurance is risky -- because you could have a hard time buying a policy in the future if your health deteriorates or you cannot afford the higher premiums. But commissions could also be a reason for an agent who discourages term. The agent often makes less money for selling term than for other forms of life insurance.
Tip: Insurance agents sometimes recommend that you switch term companies every couple of years to take advantage of the company's promotional rates in the first couple of years. This involves the risk that you would be subject to a new contestability period. You start a new contestability period anytime you switch. It is generally two years. If you die during this period, the insurance company can (and probably will) investigate the statements you made on your application. If you've given inaccurate or incomplete answers, the company may (and probably will) refuse to pay the death benefit.
The answer on this page was edited based on source material from the Federal Consumer Information Center, Washington State Office of the Ins. Commissioner, and the Ohio Department of Ins. These pages are no longer being updated. --Webmaster
