What Is a True Term Life Insurance Policy?

A term life insurance policy is exactly what the phrase suggests—a life insurance policy that insures that a certain amount of money will be paid to your survivors should you die within a certain term or specified period of time. For instance, you could sign up for an insurance policy that would pay your surviving spouse $500,000 if you die in the next ten years (the specified term). However, if you were to die even one minute after the "term," your surviving benefactors would receive nothing.

The New York Life Insurance Company explains it this way: term insurance is designed to help people purchase the protection they need when they can't afford to purchase a permanent insurance or when they only need coverage for a specific period of time. Term life insurance has a guaranteed death benefit but no cash value and the premiums increase at predetermined intervals such as one year, five years, 10 years and 20 years.

Unlike term life insurance, when you purchase permanent life insurance it builds cash value. This means that you can take out a loan for your children's education against the cash value of your permanent life insurance policy. Also, according to the American Council of Life Insurers, you can cancel or surrender the permanent life insurance policy for its cash value. You may owe taxes on some of the cash value if the sum exceeds what you have paid in premiums.

If you're considering a term policy, make sure you carefully consider how long you'll need the coverage. As explained by the Life and Health Insurance Foundation for Education, if you're pretty sure that your needs are temporary, then term insurance is probably the right choice for you. But if you think there's a possibility that you might need the coverage for a long time, then remember that if you want to renew your term policy after it expires or buy a new term policy at that time, your age, health status or other factors may make coverage very expensive.

Life insurance provided through an employer is most commonly term insurance, according to the American Council of Life Insurers. When an employee leaves, coverage is terminated. Most states require a conversion privilege, which allows employees to convert their policies to permanent policies when they leave their jobs.

Buy insurance when you're healthy. Older people and those not in the best of health pay steeply higher rates for life insurance—so buy as early as you can, but don't buy until you have dependents.