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When families have children, particularly risky endeavors are undertaken or when one simply wants to be prepared for the worst possible scenario, life insurance is oftentimes considered. When the need for extra protection is limited in time or when resources are wanting, one may wonder: What is a term life insurance policy that meets my needs? To answer this question, one must first understand what term life insurance actually is.
What is Term Life Insurance in Terms of Structure?
Term life insurance is a pure type of insurance that, once the policy expires, offers no benefits to survivors. This means that, if you purchase a 5 year term of insurance, the benefits will be unavailable after that term ends. This is different than whole life insurance, which pays out no matter when the policy holder dies.
What is Term Life Insurance in Regard to Benefits?
Term life insurance benefits from having a fixed payout which makes it very predictable. The payout is usually guaranteed to be the face value of the plan as opposed to whole insurance plans whose payout may vary according to market conditions, such as the prices of stocks and bonds. In this regard, term life insurance offers a great deal of security. If the policy is for $30,000, the beneficiaries will receive that amount, no matter what the state of the market.
What is Term Life Insurance in Regard to Flexibility?
Term life insurance, once it expires, can be renewed. The premium will be higher than it was when first purchased as one’s rates increase with their age. In fact, for individuals around retirement age, term life insurance will generally be too expensive to be practical. The rates are oftentimes variable during the term of the policy, as well, something that really only works in the insurance company’s favor.
The flexibility benefit for the insured is that they can simply opt to drop the coverage once the term expires. There is no obligation to renew once the policy term has passed. For very short term life insurance needs, this flexibility is wonderful. One need not purchase 20 years worth of insurance if they only need 5. People undertaking high-risk travel often purchase such insurance for the duration of the trip and simply fail to renew it when the trip is over.
What is Term Life Insurance Compared to Other Types of Life Insurance?
In a word: Temporary. Term life insurance is a great way to protect against disaster for limited times but not a good way to obtain long-term coverage. If you’re seeking to leave something behind in terms of inheritance for your family, whole life insurance is a better choice.