Term life insurance is a type of life insurance that provides coverage for a limited period of time (the relevant term) at a fixed rate of payments. If the insured dies during the term that the life insurance is effective, then the beneficiary will be paid the death benefits. When the relevant term expires, the life insurance protection expires as well.
At that time, the person whose life had been insured must either agree to further coverage with new, probably higher premiums and possibly the inclusion of some conditions, or give up the coverage. Thus, term life insurance is different from permanent life insurance, such as whole life insurance or universal life insurance, both of which provide guaranteed coverage at fixed premiums for the life of the individual who is insured. Furthermore, unlike many forms of permanent life insurance that build cash value over the life of the policy, term life insurance is purely life insurance and is not a form of investment.
Term life insurance is especially well suited to persons who desire life insurance to cover certain types of costs in the event of their death. Term insurance is usually the least expensive way to purchase a significant amount of insurance with reasonable premiums for a fixed period of time. For example, a young parent who desires a significant amount of life insurance to provide income for his or her dependents in the case of the parent’s death may be wise to choose term life insurance. This person needs life insurance not as an investment, but purely as income for his family in the case of his death.
When he gets older and his children are grown, he will no longer need the term life insurance. In the meantime, he can invest any monies that he is not spending on life insurance in other investments that will be relevant to his retirement or other financial needs. Moreover, a person may select term life insurance to be sure that debts, such as credit card debts, will be paid off from the proceeds instead of being a burden to his survivors.
Because term life insurance is the most affordable type of life insurance in terms of amount of protection and amount of premiums, you should consider whether this is the type of policy you need. Remember, however, that term life insurance is purely a risk protection and not an investment vehicle.