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Offering a life insurance definition that is serviceable and useful is a bit more complex than one may think! At the simplest level, life insurance is insurance where the benefits are payable upon the death of the insured. These benefits, not surprisingly, are called “death benefits”, possibly the only time one sees those words used together. Term life insurance is a specific type of life insurance and one of the most popular.
A simple term life insurance definition starts by explaining what “term” means, in this case. The term is the timeframe in which the policy will pay benefits to the insured. These terms are usually of 1, 5, 10 or 20 years in duration. The policy, once this term has expired, is cancelled and no benefits will be paid afterward.
Several different variations of policies fit the term life insurance definition. There are level term plans where the premium is guaranteed to remain constant throughout the policy term. There are also variable premiums where the insurance company reserves the right to increase the premium depending on specific criteria. If you suddenly come down with a serious illness or need surgery, you may see that premium increase, for example.
One of the elements that makes a policy fit the term life insurance definition is renewability. Term policies can usually be renewed, at a higher premium, once they expire. This differs from whole life insurance policies where the rate remains the same, year after year and, once the policy is paid off, it is owned for the rest of the insured individual’s life. This increase in price is because rates increase with the age of insured individuals. It’s unavoidable and, eventually, term life insurance become impractical as age makes the premiums go ever-higher.
In general, term life insurance is for the young and healthy who are seeking a way to safeguard their families against financial hardships in the event of their death. These policies are popular with new parents, those who are undertaking dangerous travel and those who, for some reason, are facing a situation that puts them in danger of life and limb. They are not an investment strategy, as are whole life policies.
A simple term life insurance definition, then, would be the following. Term life insurance policies are those which cover the insured individual for a specific length of time at a premium which may or may not be variable and which pay out their face value upon that individual’s death, should that death occur within the term of the policy. They are “pure” insurance, offering no benefit beyond the period for which the insured individual pays a premium.