Term Life Insurance: What is Term Life Insurance and how does term insurance work?

	Compare Rates & Save

Term life insurance may be simply defined as "A financial contract that provides a specified death benefit but no cash build up or investment component. The guaranteed premium remains constant only for a specified "term" of years, and the policy is usually renewable at the end of each term period."

Term life insurance is also often described as "pure insurance protection," and does not have the accumulating cash value features inherent in whole life, universal life and variable life insurance policies. Term life insurance provides guaranteed level premiums and a specified amount of coverage for a specific period of time - as short as one year, or in duration's of 5, 10, 15, 20, 25 or even 30 years.

At the end of the initial guaranteed term period, almost all policies offer the option of providing new medical information and applying for a new guaranteed term period (called re-entry) or of converting (without medical evidence) to a whole life type product at a permanently fixed price from the same company.

Generally, people purchase life insurance if they want to create a guaranteed lump sum of capital to provide income, provide college eductions for children, make a specific cash bequest or to protect loved ones from debts. For example, if you and your spouse own a home, and you were to die tomorrow, your spouse could use life insurance proceeds to pay the mortgage in full or create a sinking fund for future payments.

Because term life insurance provides no cash build up, it is designed to simply create a targeted amount of survivor capital for a fixed, guaranteed period of time ("term") at the lowest possible guaranteed outlay during the time the protection will be needed. For many people term life insurance meets the following goals:

* Buying the full amount of coverage needed to meet realistic family security goals.
* Death benefits and premiums are guaranteed for the entire period for which protection will be needed.
* Simple and understandable policies, premiums, etc.
* The lowest possible current out of pocket outlay to maintain life insurance coverage.

How long should the guaranteed premium and term life period be?

Deciding which guaranteed term duration you should buy - 10 years, 20 years, 30 years, or some other number - requires a thoughtful review of your debts, financial needs, dependants' needs, and when and if all these might change over time. A buyer needs to decide how long a guaranteed term life insurance policy needs to be in force with a guaranteed premium so that the appropriate funds will be available to meet targeted financial needs such as:

* An amount that would be needed to replace all or a portion of your income for a given period of time.
* How long child care might be needed.
* The time /payments remaining on existing short-term and long-term debts and mortgages.
* The duration of Children's and/or spouse's education expenses.
* How long you might have obligations or caregiver commitments to parents or elderly relatives.

Because term life insurance costs increase with age (after the initial guarantee period of 10 to 30 years) and will in most cases jump quite dramatically if continued year-by-year at the end of your initial guaranteed term life insurance period, it is probably smart to select a generous guaranteed term period. Should your needs decline prior to the end of the guarantee period you selected, the policy can be terminated early or the face amount (and thus the premium) reduced prior to the end of the original guarantee period.