Term Life Explained | Life Insurance 101

Term Life Explained | Life Insurance 101

Term life insurance is life insurance coverage provided for a fixed term agreed upon by the insurance company and policy holder. With this type of life insurance policy, the policy holder pays a set premium for the coverage, and if the person happens to die during this time their beneficiaries will receive a full payout of the agreed upon death benefits. After that term has ended so does the coverage.

Term life insurance is the most popular type of life insurance for a number of reasons. First is that it’s a cheap alternative to permanent or whole life insurance.  Term insurance uses the same mortality tables for determining your premium as permanent life insurance, and a death benefit which is always income tax free, but the insurance company saves money because the term life insurance plans often expire without a payout. Permanent plans, on the other hand, always have a payout, eventually, and as such have a higher premium in order to cover these additional costs.

Another perceived advantage of term life insurance is its flexibility and convenience. You choose the amount of time that you want life insurance coverage and can even choose as little as a year. Under term policies you have the option to renew or discontinue your life insurance according to your changing coverage needs.

There is one potential drawback of term insurance and that is the unpredictability of the insurance market. When your term is up and you want to renew, or perhaps change companies, you run the risk of having to pay a new, higher rate than before with potentially different conditions on your plan. This is why if you are over the age of 50, it is recommended that you look for permanent life insurance. With a continually updating insurance policy as you age and your term comes due you will be seen as an increased risk and as a result your premiums go up.

Despite some risk associated with term life insurance, if you are under the age of 50 financial advisors still look at life insurance quote as the smarter move.  This is because by buying term life insurance, you can save money and invest the difference that you’re are saving from permanent insurance into other reserves and get better return on your investment.

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