How Does Term Life Insurance Work?

Getting a Term Life Policy

When you need affordable life insurance coverage, term policies are likely to be your primary option. You can get quotes for these policies by going through an insurance agent or one of the online insurance brokers. Look at the costs of the premiums, as well as the amount of the death benefit your beneficiaries will receive. Although you may not have to complete a full physical to be approved by the insurance underwriter for the policy, you will be asked questions about your medical history.

Basics of the Policy

Term life insurance policies provide coverage for a specified length of time only. That term can be anywhere from one to twenty years depending on the policy you selected. During the term, your beneficiaries will be entitled to receive the specified death benefit if you pass away. For example, if you have a ten year policy for $100,000 and die during the ninth year, your beneficiaries will receive the full $100,000. Failure to pay the premiums, of course, will cause your policy to be canceled before the end of the term. Because the insurance company is betting that you will not die during the term, the insurance premiums are more affordable because the risk to the company is lower.

Reaching the End of the Term

When the specified term of the policy ends, the policy expires and the beneficiaries are entitled to receive nothing after that point. However, the policy holder does have two options. First, he or she can usually renew the policy for another term. The premiums are almost always going to be higher because as your age increases so does the risk of your death during the term. In some cases, term life policies cannot be renewed once you reach a certain age. Policies usually do not guarantee renewal of term life policies. Second, you can convert the policy into a permanent life insurance policy. The amount of coverage will be the same but the premiums will be higher in most cases. However, you will be able to keep your policy regardless of age or health issues as long as you continue to pay the premiums. The term life policy must be converted prior to its expiration.

Considering Other Options

While term life insurance is one option, you may want to consider other choices before purchasing a policy. Whole life and universal life are the other two widely available life insurance types. Both are permanent policies. With whole life, your policy will build cash value which you can use as collateral for a loan from the insurance company. Beneficiaries also receive a guaranteed death benefit (loan amounts are deducted from the benefit, however). Universal life is similar to whole life but offers more flexibility. For example, you can pay larger premiums to build up cash value more quickly or you can stop paying premiums once enough cash value has accumulated to cover them. Discuss all of your options with a trusted life insurance agent before making a policy choice.