Term life insurance , also called pure life insurance, is a type of life insurance that guarantees payment of a stated death benefit if the covered person dies throughout a specified term. Once the term expires, the policyholder can either renew it for another term, convert the policy to permanent coverage, or enable the term life insurance policy to terminate.
How Term Life Insurance Works
When you obtain a term life insurance policy, the insurance company determines the premiums based on the policy's value (the payout amount) and your actual age, gender, and health. Sometimes, a medical exam might be required. The insurance company can also inquire about your driving record, current medications, smoking status, occupation, hobbies, and family history.
In the event that you die throughout the policy term, the insurer will probably pay the policy's face value to your beneficiaries. This cash benefit—which can be, generally, not taxable—works extremely well by beneficiaries to be in your healthcare and funeral costs, consumer debt, or mortgage debt, among other things. However, if the policy expires before your death, there's no payout. Perhaps you are able to renew a term policy at its expiration, but the premiums will be recalculated for your actual age during the time of renewal.
Term life policies have no value other than the guaranteed death benefit. There is no savings component as found in a life time insurance product.
Term life is normally the least costly life insurance available as it provides a benefit for a restricted time and provides just a death benefit. As an example, a healthier 35-year-old non-smoker can typically obtain a 20-year level-premium policy with a $250,000 face value for $20 to $30 per month.
With respect to the issuer, investing in a expereince of living equivalent might have significantly higher premiums, possibly $200 to $300 monthly, or more. Because most term life insurance policies expire before paying a death benefit, the overall risk to the insurer is less than that of a lasting life policy. The reduced risk allows insurers to pass cost savings to the customers in the shape of lowering premiums.
Interest rates, the financials of the insurance company, and state regulations may also affect premiums. Generally, companies often offer better rates at "breakpoint" coverage quantities of $100,000, $250,000, $500,000, and $1,000,000.