Define Term Life Insurance

To define term life insurance, we should first define life insurance. The Random House Unabridged Dictionary defines, it as "insurance providing for payment of a sum of money to a named beneficiary upon the death of the policyholder or to the policyholder if still living after reaching a specified age."

How to Define Term Life Insurance

We can define term life insurance as a temporary life insurance policy. It offers coverage that protects against the risk of death for a specified period of time. A term life insurance policy is typically written for a five-year to thirty-year term. Some term policies set their term to a specific age, typically 65. It is the simplest, most basic life insurance policy available on the market today.

Much like home and auto insurance, if no claims are made within the policy period, a term policy will not pay out any benefits. In effect, a term policy's coverage only applies if you pass away before its expiration date.

How Permanent Life Insurance Differs from Term Life Insurance

• Specified periods of coverage define term life insurance and differentiate it from permanent life insurance. A term life insurance policy offers coverage that expires at the end of the policy term. A permanent life insurance policy offers coverage throughout your lifetime. As long as you pay your policy premiums, this coverage is guaranteed for as long as you live.

• Your beneficiaries can only collect on term insurance if you die before the policy expires. With a permanent life policy, they will collect whenever you die, regardless of your age.

• A term life insurance policy has no returns or cash value beyond its stated death benefit. A permanent life policy not only insures you against the risk of death, but also provides you an investment vehicle that enables you to build cash value. A portion of your premium goes toward the cost of your insurance, while the balance goes into an investment account or an interest-bearing account.

Types of Term Life Insurance

There are five different types of term life insurance policies, each one designed to meet different individual needs and financial situations. They are:

Level Term Life Insurance

This is the most common type of term life insurance. It the most popular of all the term plans, because it offers fairly inexpensive coverage for a relatively long period of time. With this type of insurance, you will pay a fixed premium, for a fixed amount of coverage, for a pre-determined number of years.

Renewable Term Life Insurance

By purchasing this type of term plan, you can renew your policy for another term when it is due to expire, without a medical exam. As such, this policy can stay in force for more than one term. This term policy is typically renewed in one-year or five-year increments.

Convertible Term Life Insurance

When you purchase this type of term policy, you have the right and option to convert your term insurance to permanent insurance. If you choose to convert your term policy, there is no requirement for a medical exam to prove good health.

Typically, converting the policy will result in higher rates, because the risk of death increases with age. The face value of the policy, however, will remain fixed. The right to convert the policy will continue for a specific number of years or up to a specific age.

Decreasing Term Life Insurance

This is the good ol' mortgage life insurance policy that is typically marketed to homeowners. It is also one of the options offered for conversion from a level term policy.

If you purchase a decreasing term insurance policy, your premiums remain level throughout the term. However, the face value of the policy keeps decreasing each year. By the time the policy expires, your coverage will equal zero.

It is even less expensive than level term, because the amount of coverage provided keeps shrinking.

Return of Premium Term Life Insurance (ROP)

This is a relatively new type of term insurance policy. It provides a guaranteed refund of your premiums at the end of the policy period, as long as you have not passed away before then.

This life policy costs significantly more than a regular term policy, but less than a permanent life policy. To get the "return of premium" benefit, you will pay an extra sum, in addition to the base premium. Some insurance companies will refund only the base premium, while others return the entire amount. The policy premiums remain level throughout the policy period.

Term policies that have a "return of premium" feature are typically written for 15, 20 and 30 year terms. You must keep the policy in force until it expires, or you forfeit your return of premium benefit.

Conclusion

A term life insurance policy is a valuable financial tool to use if you need to protect your family and hard-earned assets for a specific period of time. Keep in mind that not all term policies have been created equal. Compare the features and benefits of each type to determine which one is best suited to your individual needs and financial situation. Picking the wrong one could leave you with little or no insurance.

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