What Is Term Life Insurance?

Suzanna De Baca -- Expert Business Source, 5/7/2007 6:52:00 AM

If you’re considering purchasing life insurance, term insurance is perhaps the most straightforward and affordable form available on the market today. Term insurance does not provide the savings feature that a Whole Life policy does, which makes it cheaper but also means that when the policy expires you will not have any cash value to show for your premium payments.

Why would you want to purchase term insurance and what are the features?  In addition to affordability, there are some options a policyholder can select that make this a flexible type of coverage.  Below are some of the features and types of term life insurance.

Affordable:  Large amounts of term insurance can be purchased at relatively low premium prices so it is especially appropriate to provide coverage for those on a budget or who only wish to purchase insurance coverage for a specific duration.

Set Period of Time:  Term insurance is typically issued for a set period of time, such as 10, 20 or 30 years.  The maximum issue age is often 70 years, although some companies offer policies that extend past that age.

The longer the period of time, the higher the premium.  The premium is often guaranteed for a certain number of years.  Once the policy term has expired, however, the coverage ends.  For this reason, term insurance is sometimes referred to as “temporary” life insurance.

Renewable versus Non-Renewable:  This type of coverage is offered as renewable or non-renewable.  Renewable term enables the policyholder to prolong coverage past the original period of the policy.  When the policy is renewed the premium is raised to the amount that would be charge for the attained age of the insured. Renewability is generally offered for a specific stated period, which varies depending on the type of policy.  Not surprisingly, renewability commands a higher premium than a non-renewable contract.

Convertible:  Some term policies are convertible to whole life, or permanent, insurance.  If the purchaser of the policy elects a convertibility option, they can convert to whole life insurance without evidence of insurability.

Level, Decreasing and Increasing Term: Various types of term insurance are available, with the main difference being how the death benefit changes during the life of the policy.  With level term, the death benefit is level through the policy.  With decreasing term, the coverage decreases over time.   This type of coverage can be useful or appropriate when an individual has a decreasing need like a mortgage or college expenses for children.  Increasing term, by contrast, is usually used as a rider and increases the death benefit of a policy.

In summary, term insurance is a cost-effective and flexible but temporary form of life insurance coverage. 

Suzanna de Baca is President of Private Capital Solutions Group.  She is a Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS), 7 Hanover Square, New York, NY 10004, (888) 600-4667.  Securities products/services and advisory services are offered through PAS, a registered broker/dealer and investment advisor. Private Capital Solutions Group is not an affiliate or subsidiary of PAS.