Paul Sanchez
Term life insurance is a type of life insurance that provides coverage at a fixed rate of payments for a limited period of time. After this period expires, coverage at the previous rate of premiums is no longer guaranteed, and the client must decide whether to forgo coverage or obtain further coverage with different payments or conditions. Term life insurance is typically the least expensive way to purchase a substantial death benefit on a coverage amount per premium dollar basis over a specific period of time. Most term life policies allow conversion to permanent life insurance.
| Characteristics | Values |
|---|---|
| Type of insurance | Term life insurance |
| Coverage | Fixed rate of payments for a limited period of time |
| Renewal | Possible for another term or conversion to permanent coverage |
| Premium | Based on a person's age, health, and life expectancy |
| Payment | Death benefit paid to beneficiaries if the insured dies during the term |
| Comparison | Cheaper than permanent life insurance |
| Variation | Annual renewable term (ART) |
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What You'll Learn
Convertibility
Term life insurance provides coverage at a fixed rate of payments for a limited period of time. Once the term expires, the policyholder can either renew it for another term, convert it to permanent coverage, or allow the term life insurance policy to lapse. Term life insurance is typically the least expensive way to purchase a substantial death benefit on a coverage amount per premium dollar basis over a specific period of time.
The simplest form of term life insurance is for a term of one year. The death benefit would be paid by the insurance company if the insured died during the one-year term, while no benefit is paid if the insured dies one day after the last day of the one-year term. The premium paid is then based on the expected probability of the insured dying in that one year. Because the likelihood of dying in the next year is low for anyone that the insurer would accept for the coverage, purchase of only one year of coverage is rare.
Term life insurance can be contrasted with permanent life insurance such as whole life, universal life, and variable universal life, which guarantee coverage at fixed premiums for the lifetime of the covered individual unless the policy is allowed to lapse due to failure to pay premiums. Permanent life insurance products also feature a savings component, which is not found in term life insurance.
A version of term insurance which is commonly purchased is annual renewable term (ART). In this form, the premium is paid for one year of coverage, but the policy is guaranteed to be able to be continued each year for a given period of years. This period varies from 10 to 30 years, or occasionally until age 95. As the insured ages, the premiums increase with each renewal period, eventually becoming financially inviable as the rates for a policy would eventually exceed the cost of a permanent policy. In this form, the premium is slightly higher than for a single year's coverage, but the chances of the benefit being paid are much higher.
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Term life insurance vs permanent life insurance
Term life insurance provides coverage at a fixed rate of payments for a limited period of time. After this period expires, coverage at the previous rate of premiums is no longer guaranteed. The policyholder can either renew it for another term, convert it to permanent coverage, or allow the term life insurance policy to lapse. Term life insurance guarantees payment of a death benefit to the insured's beneficiaries if the insured person dies during the specified term. These policies have no value other than the guaranteed death benefit and don't feature a savings component, unlike permanent life insurance products. Term life premiums are based on a person's age, health, and life expectancy.
A version of term insurance which is commonly purchased is annual renewable term (ART). In this form, the premium is paid for one year of coverage, but the policy is guaranteed to be able to be continued each year for a given period of years. This period varies from 10 to 30 years, or occasionally until age 95. As the insured ages, the premiums increase with each renewal period, eventually becoming financially inviable as the rates for a policy would eventually exceed the cost of a permanent policy. In this form, the premium is slightly higher than for a single year's coverage, but the chances of the benefit being paid are much higher.
Term life insurance can be contrasted with permanent life insurance, such as whole life, universal life, and variable universal life, which guarantee coverage at fixed premiums for the lifetime of the covered individual unless the policy is allowed to lapse due to failure to pay premiums.
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Term life insurance premiums
Term life insurance provides coverage at a fixed rate of payments for a limited period of time. After this period expires, coverage at the previous rate of premiums is no longer guaranteed. The policyholder must then either forgo coverage or obtain further coverage with different payments or conditions. If the insured person dies during the term, the death benefit will be paid to the beneficiary. Term insurance is typically the least expensive way to purchase a substantial death benefit on a coverage amount per premium dollar basis over a specific period of time.
A version of term insurance which is commonly purchased is annual renewable term (ART). In this form, the premium is paid for one year of coverage, but the policy is guaranteed to be able to be continued each year for a given period of years. This period varies from 10 to 30 years, or occasionally until age 95. As the insured ages, the premiums increase with each renewal period, eventually becoming financially inviable as the rates for a policy would eventually exceed the cost of a permanent policy. In this form, the premium is slightly higher than for a single year's coverage, but the chances of the benefit being paid are much higher.
Term life insurance can be contrasted with permanent life insurance such as whole life, universal life, and variable universal life, which guarantee coverage at fixed premiums for the lifetime of the covered individual unless the policy is allowed to lapse due to failure to pay premiums.
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Death benefits
Term life insurance is a type of life insurance that provides coverage at a fixed rate of payments for a limited period of time. This is usually the least expensive way to purchase a substantial death benefit on a coverage amount per premium dollar basis over a specific period of time.
The simplest form of term life insurance is for a term of one year. The death benefit would be paid by the insurance company if the insured died during the one-year term, while no benefit is paid if the insured dies one day after the last day of the one-year term. The premium paid is then based on the expected probability of the insured dying in that one year.
After the term expires, the policyholder can either renew it for another term, convert it to permanent coverage, or allow the term life insurance policy to lapse. Term life insurance guarantees payment of a stated death benefit to the insured's beneficiaries if the insured person dies during the specified term. These policies have no value other than the guaranteed death benefit and don’t feature a savings component (as is found in permanent life insurance products).
A version of term insurance which is commonly purchased is annual renewable term (ART). In this form, the premium is paid for one year of coverage, but the policy is guaranteed to be able to be continued each year for a given period of years. This period varies from 10 to 30 years, or occasionally until age 95. As the insured ages, the premiums increase with each renewal period, eventually becoming financially inviable as the rates for a policy would eventually exceed the cost of a permanent policy. In this form, the premium is slightly higher than for a single year's coverage, but the chances of the benefit being paid are much higher.
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Term life insurance types
Term life insurance provides coverage at a fixed rate of payments for a limited period of time. After that period expires, coverage at the previous rate of premiums is no longer guaranteed. The policyholder can either renew it for another term, convert it to permanent coverage, or allow the policy to lapse. If the insured person dies during the term, the death benefit will be paid to the beneficiary. Term life insurance is typically the least expensive way to purchase a substantial death benefit on a coverage amount per premium dollar basis over a specific period of time.
Term life insurance can be contrasted with permanent life insurance, such as whole life, universal life, and variable universal life, which guarantee coverage at fixed premiums for the lifetime of the covered individual unless the policy is allowed to lapse due to failure to pay premiums. Term life insurance does not have a savings component, unlike permanent life insurance products.
A commonly purchased version of term insurance is annual renewable term (ART) insurance. In this form, the premium is paid for one year of coverage, but the policy is guaranteed to be able to be continued each year for a given period of years, usually 10 to 30 years, or occasionally until age 95. As the insured ages, the premiums increase with each renewal period, eventually becoming financially inviable as the rates for a policy would exceed the cost of a permanent policy. In this form, the premium is slightly higher than for a single year's coverage, but the chances of the benefit being paid are much higher.
The simplest form of term life insurance is for a term of one year. The death benefit would be paid by the insurance company if the insured died during the one-year term, while no benefit is paid if the insured dies one day after the last day of the one-year term. The premium paid is then based on the expected probability of the insured dying in that one year. Because the likelihood of dying in the next year is low for anyone that the insurer would accept for coverage, the purchase of only one year of coverage is rare.
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Frequently asked questions
Term life insurance provides a death benefit for a specified period of time that pays the policyholder's beneficiaries. Once the term expires, the policyholder can either renew it for another term, convert it to permanent coverage, or allow the term life insurance policy to lapse.
Yes, most term life policies allow conversion to permanent life insurance. Convertibility is a policy provision that lets you change your term insurance into a permanent whole life policy later on – without having to get a new medical exam.
Once the term expires, coverage at the previous rate of premiums is no longer guaranteed and the client must either forgo coverage or potentially obtain further coverage with different payments or conditions.
