Term Life Insurance Explanation
Term life insurance provides financial protection in the event of the death of the insured. It is sometimes considered to be "no frills" insurance because it provides no additional benefits such as the accumulation of cash value. Because of its relatively low cost, it is often purchased in situations where a large amount of coverage is needed for a specified period of time and not much money is available for premiums.
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Timeframe
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As opposed to whole life insurance which is intended to provide coverage throughout a person's life, term insurance is designed to cover a specific period of time. For example, when seeking insurance protection to cover a 30-year mortgage, a 30-year term policy could be purchased where the face amount decreases along with the mortgage.
Characteristics
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Term insurance will provide funds to a beneficiary in the event of the death of the insured. Premiums are paid on a monthly, quarterly, semi-annual, or annual basis. The amount of premium will vary based on several factors, including the insured's age, health and tobacco use. Unlike other forms of insurance such as whole life or universal life, term insurance accumulates no cash value.
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Types
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One common type of term insurance is level term. With this type, the amount of coverage and the premium stay the same throughout the life of the policy. Because insurance costs increase as the insured ages, the premium is typically higher. With adjustable term insurance, the premium can vary depending on mortality rates and lifestyle factors. However, premiums can never exceed the maximum stated in the policy.
Advantages
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A major advantage of term insurance is that it is the cheapest form of life insurance coverage. This makes it an attractive alternative in situations such as a young family looking for affordable coverage to start out. In many cases, a term policy can be converted to permanent insurance without evidence of insurability. Also, the money that is saved on premiums could be placed into an investment vehicle such as a mutual fund.
Disadvantages
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A disadvantage of term insurance is that it builds no cash value. This differs from permanent insurance where a cash fund accumulates and can be used to fund retirement or for emergencies. Since term policies only cover a specified time period, an insured could face a situation where coverage runs out and additional coverage cannot be obtained due to age or health reasons.
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