What is Term Life Insurance?

Young, growing families with limited income and a high insurance need represent one situation where term life insurance works very well

Term life insurance, as the name suggests, provides life insurance only for a limited period of time, or “term.” Other types of policies, such as whole life, universal life or variable life, are considered to be “permanent insurance” and are designed to provide protection for the entire life of the insured. Additionally, term insurance provides only “pure” insurance protection and does not have the saving feature typically found in most permanent (“cash-value”) life insurance policies.

Term insurance might be compared to an automobile insurance policy. While the auto policy is in force, the insured enjoys the protection against loss from an auto accident. If no accident happens, no benefits are paid under the policy. At the end of the period covered by the policy, there is no refund of the premiums paid. Term insurance works in much the same way.

What is Term Life Insurance?

Unlike the typical permanent policy, the cost of term life insurance increases as the insured becomes older. The savings feature usually found in permanent policies provides a “cash value” build-up within the policy that allows for a constant, level premium. In later years, the cost of the typical term life policy will far exceed the cost of the typical permanent policy.

Term life insurance is thus most useful when an insured is relatively young and the need is for temporary or short-term coverage. Young, growing families with limited income and a high insurance need represent one situation where term life insurance works very well. Situations where a need will decline over time, such as with a home mortgage, are also good candidates for term life insurance.