Term Insurance

Term insurance, also known as term life insurance, is a type of life insurance that provides coverage for only a limited period of time. When that coverage period expires, a new policy must be obtained, usually with different rates and conditions. It is the oldest form of life insurance - which is now available for purchase in perpetuity. It is also the least expensive form of life insurance, offering a substantial death benefit on an amount per premium dollar basis.

Term insurance is most often used for those simply looking for short term income needs in the event of death. Those planning future estates and giving to charities usually opt for permanent life insurance policies. Most often, these permanent life insurance policies also build a cash value over the life of the policy, allowing the insured to withdrawal a predetermined amount under certain conditions. In this sense, term insurance functions like all other common insurance policies; car insurance, home insurance, etc. In the event your home is not flooded, or you do not get into a car accident, nothing is paid. In permanent insurance policies, the policy is still worth a cash value for withdrawal, even if the insured does not die.

The most common usage for term insurance policy is to provide income for any dependents. It can be used for consumer debt, educational purposes, future funeral costs, and home mortgages. It is most commonly used by younger professionals with families, who might not necessarily have any substantial savings amassed. By the time they reach that point, generally near retirement age, their investments and assets will be replaced by their term insurance policy as a means of supporting their families in the future.

There are two major types of term insurance: annual renewable and level term. Annual renewable is simply for a term of one year. The premium on this type of insurance is paid based on the likelihood that individual will die within the next year. Because the probability is low for anyone to die within the next year, this type of policy is rarely purchased. The more common type of term insurance is the level term policy. This generally comes in terms of 10, 15, 20, and 30 years. The annual cost of this policy is calculated based on renewable term rates for each year that has passed. While most level term policies offer extensions, these usually are not guaranteed.

The longer the level term policy length, the less of a gamble for you and your family (obviously). If you were to die the day after the policy expires, your family would receive nothing. If you can afford to purchase a level term policy longer than 20 years, it is usually worth it to go ahead and buy permanent life insurance. Have an insurance expert run an analysis for you to see if it makes financial sense, but as a general rule of thumb, it's the way to go. If you have a good idea of your fixed costs over the next few years (college expenses, mortgages, etc.), you can always opt for annual renewable insurance for this short period of time. It's always a good idea to talk to an insurance expert to figure out your best option - many companies will offer free consultations, and it's well worth for the peace of mind.