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Answering The Questions: What Is Term Life Insurance?

Best Term Life Insurance Plans Depend On Needs

By Mike Heuer

About 70 percent of life insurance plans sold in the United States are whole life insurance plans, according to the Insurance Information Institute. A big reason is many people do not understand what is term life insurance.

Term life insurance, in its most basic form, is a contract between a policyholder and an insurer that might include one or two other parties: the named insured and the beneficiary. The contract is in effect for a set number of years and then simply expires if the named insured outlives the term for which coverage is written.

Term life insurance was the first kind of life insurance ever created and is considered by many insurance experts to be the purest form of life insurance sold. A term typically lasts from 10 years to 30 years. The person whose life is insured is the “named insured” and might be the policyholder, a spouse, family member or business partner. Term life insurance or any other kind of life insurance cannot be underwritten for someone who has no vested relationship with the policyholder, which is why policyholders may only insure themselves, spouses, family members or business partners.

The policyholder typically pays all premiums, and rates for term life insurance plans are the most affordable of all life insurance options. The reason term life is such a good deal is due to two primary factors. The first is that it does not grow cash value over time like a whole life insurance plan. Instead, it simply provides a set level of coverage for a predetermined number of years and then simply expires if the named insured outlives the term.

The second reason term life insurance plans are very affordable is due to the fact the vast majority of policies do not result in a death benefit being paid. Studies show as much as 99 percent of term life insurance plans do not wind up paying a death benefit, and that means the policies are a low risk for insurers. Because so few plans pay a death benefit, there is no medical exam required to buy a policy, and premiums remain the same throughout the term.

When paying down a home mortgage and using term life insurance to protect the financial obligation, a standard level term life plan likely is not the best option. Instead, a decreasing term life policy in which the coverage amount as well as premium decreases over the years very well may be the best one to buy.

A decreasing term life plan is intended to protect financial obligations that lessen over the years, such as a home mortgage that gets paid off over time. So the amount of coverage provided also decreases to match the decreased financial obligation.

Another term life plan that might be better to use than a standard level term is a return of premium term life policy. Such plans initially cost more than level term plans. But if the named insured outlives the policy term, most of the premiums are refunded in a lump sum, making them a very affordable way to protect financial obligations at a lower rate than some other types of plans.

Even an annual renewable term life policy could be the best option if the policyholder and named insured have financial obligations but are not certain of how long it might last. So renewing each year could be the best option, although premiums typically rise each year the plan is renewed.

And if considering a switch to whole life insurance plan, buying a term life insurance policy that can be converted into a permanent life insurance policy would be the way to go. Term life plans to not grow cash value over the years, but permanent or whole life insurance policies to grow cash value.