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What is Term Life Insurance?
Term life insurance is a form of life insurance that provides protection for a specific number of years.
Term life insurance is temporary life insurance protection. Term life insurance is considered "Pure Protection", because you pay only for the life insurance. There is no cash value build up within the policy.
Term life insurance usually offers coverage for 1-30 years. Common lengths of coverage are available for 10, 15, 20 or 30 years. Depending on your age and health, you may even be able to get term life insurance for 40 years.
Term life insurance is often purchased by consumers to provide protection for their outstanding loans, including home loans, car loans, student loans, and credit card debt.
Many couples and young families choose term life insurance because it may offer the most affordable option if you are on a budget.
Example of Term Life Insurance
For example, a person buys a 10 years level term life insurance policy with a coverage amount of $100,000 and names their spouse as primary beneficiary.
If the insured person dies within the 10 year term of the policy, the spouse would receive the $100,000 from the life insurance policy. Life insurance proceeds with an individual named as beneficiary are usually paid free from federal income tax.
However, if the insured person in our example were to outlive their 10 year term, the policy would expire and no money would be paid out.
Some term life insurance policies are renewable, or may be converted to permanent (whole) life insurance.
Standard Features of Term Life Insurance
Term life insurance has three standard features which include Level, Convertible, and Renewable.
Level term life insurance usually refers to the life insurance premiums remain the same each year of the policy. The amount of coverage may also stay the same. Level term life insurance offers you rates and coverage that may stay the same for the entire term of the policy, usually up to 30 years.
A term life insurance policy may be convertible, offering you the option of converting the policy into a permanent life insurance policy. The owner of the life insurance policy usually has a specific number of years during their term life insurance policy in which to choose to convert their policy to a permanent plan. Life insurance premiums will increase for the permanent life insurance policy.
Some term life insurance plans are renewable. Term life insurance that is renewable offers the owner of the policy the option of renewing their policy at the end of the policy term. This option is usually offered up to a specific age limit, usually age 65 or 70.
For example, a 10 year term life insurance policy may be renewed for another 10 year term. If the life insurance policy is renewed, a physical examination may be required. The annual premium of the term life insurance policy will usually increase when the policy is renewed.
Types of Term Life Insurance
- Decreasing Term Life Insurance - provides a life insurance coverage amount that decreases each year the policy is in force. Your life insurance premiums remain the same for the entire term of your policy.
- Annual Renewable Term Life Insurance - provides the owner of the policy the option to renew their term life insurance coverage each year, usually up to a specific age limit.
- Renewable Term Life Insurance - provides coverage that is renewable at the option of the insured person. The insured is not required to take a physical exam. Regardless of the insured's health, the insured must be allowed to renew the life insurance policy.
- Level Term Life Insurance - provides coverage and premiums that remain the same for the entire term of the policy - usually 10, 15, 20 or 30 years.
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