The Benefits and Drawbacks of Term Life Insurance

Life insurance is an agreement between you and an insurance company, in which you agree to pay the insurance company a certain amount of money over time and they agree that if you die they will give your family more money than you paid. Purchasing termlife  insurance can be understood as renting life insurance for a set amount of time, as the insurance only lasts for a set amount of time, rather than your whole life.

Term insurance basics

With term life insurance, you purchase the insurance for a set amount of time, or a "term." Term policies are available for terms such as 5, 10, 20, or 30 years, for example. The policy you buy is set at a price for the term, meaning that you'll pay the same amount of money for the policy ever year until the term is up. If you should die during the term, the beneficiaries of your policy will receive the “face amount” of the policy (that is, the amount of coverage purchased). If you do not die during the term, there is no payout.

Cost

The premiums of term insurance are generally fixed, meaning that the amount you pay for the insurance does not change over the course of the term. However, the premium can vary from person to person, and depends on a number of factors, including your age, health, and lifestyle. An older person who smokes, for example, will generally pay higher premiums than a younger person who does not smoke, as the older smoker may be more likely to die within the term. For the most part, term products are less expensive than permanent or whole life insurance.

For help figuring out how much life insurance you need, see our article How Much Life Insurance Do You Need?

Convertibility

In many cases, term insurance is not available for people over the age of 65. However, in certain cases and with certain policies, a term policy can be converted to a whole life policy without “evidence of insurability” (a medical exam). This would allow you to retain life insurance coverage, even if your term policy were to expire. Even when a term policy can be converted to a permanent policy, though, there may be a maximum age past which the policy can no longer be converted. If you're interested in converting an existing term policy, it's best to speak with a professional life insurance agent about your situation.

To learn more about permanent (whole life) insurance, see our article Permanent Insurance.

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