What is term life insurance?

Term life insurance is a form of life insurance that provides coverage for a specified term, or length of time, as laid out in the life insurance policy. If the policyholder dies during that term, the insurance company pays out the death benefit to the named beneficiary.

A term life insurance policy is the contract between you and the insurance company. As the policyholder and insured person, you make payments to the insurance company in exchange for a benefit to be paid out after your death. As the insurer, your insurance company promises to fulfill that promise according to the provisions of your contract.

The contract will spell out the term length as well as the beneficiary. The beneficiary is the person who will receive the death benefit. This may be a your spouse, your child or someone else with an insurable interest.

When you buy life insurance, you are providing a way for your loved ones to take care of financial obligations after your passing.

How does term life insurance work?

Understanding how term life insurance works can be very helpful. It’s especially important to know three things:

• The term length
• The amount of coverage (or “face value” of the policy)
• The amount of your premiums

Your premium payment is the monthly, periodic cost of paying for your insurance policy. This amount will depend on many factors, such as your age, your health, and the amount of insurance you would like to take out. That is why insurance companies provide quotes; it’s impossible to say how much a particular policy would be without knowing all the details of your particular situation. The experts at the insurance company need that information when determining cost in relation to risk.

Once you have applied for term life insurance, you may be required to have a medical exam or answer a health questionnaire to determine your level of health. When this is complete and you have been approved, all that is left is to sign your paperwork and pay your premiums.

If you die during the term specified in your policy (assuming no exclusions apply to your situation), your beneficiary receives the guaranteed death benefit.

Commonly, the term period for term life insurance is 20 or 30 years, although plenty of people may find 5 or 10 years of coverage to be sufficient for their needs.

Term Life Example

For instance, say there is someone shopping for insurance who is 25 years old. They’ve never smoked in their life, and they’re fit and in great shape. There is a very low chance they will die during the term. These factors, along with their gender and even their occupation, mean they’re likely to find great rates on term life insurance.

Contrast that with someone of greatly advanced age, in rapidly declining health; their rates on term life are likely to be much higher.

This discrepancy is why it’s helpful to work with a qualified insurance professional, who can help you navigate these differences when pricing quotes on life insurance.

In either case, let’s suppose the applicant has found an applied for the perfect policy and been approved. Their term life insurance policy promises a death benefit of $500,000 if they during the term period of 10 years.

Unfortunately, this event comes to pass during the specified time frame; the policyholder’s beneficiary is notified of the death, contacts the insurance company, and receives their benefit.