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What is Term Life Insurance & How Does it Work?

By Compuquotes Team on December 5th, 2008

Many people opt for term life insurance rather than whole life, or permanent, insurance for many different reasons. Term life insurance is also commonly referred to as term assurance, and is the original form of life insurance developed. Term life insurance actually builds no cash value over time, so it is not considered to be a relevant investment for retirement purposes or financial planning. Term life insurance actually provides coverage for a limited amount of time, which is the relevant term.

Once the term life insurance period has ended, you will be able to choose between dropping the policy or to continue paying annually, usually at an increased premium, to continue the coverage. Most term life insurance policies cover a period of ten, fifteen, twenty, and twenty-five years, although custom policies can be written for individuals, based on need. If the policyholder should die within the covered term, the death benefit will be paid to the beneficiary named on the policy, usually a spouse or child.

Term life insurance is the most affordable way to purchase and maintain a substantial death benefit in which you pay for coverage on a per premium basis. This type of insurance works much like every other type of insurance coverage in that you pay monthly (or quarterly) premiums in exchange for coverage contained within the policy. As long as the premium payments are kept up to date and the term has not expired, claims filed will be satisfied. Furthermore, it is important to know that you should not expect premium returns if you never file a claim. Term life insurance is purely risk protection for you and your loved ones.

Because term life insurance provides death protection for a predetermined period of time, also known as the term, it may very well be the simplest form of life insurance known. Term life insurance is ideal for the family living on a budget that needs temporary life insurance protection. This type of insurance can be purchased in large amounts (for long periods of time) at very low premiums, which most people can afford. This flexibility and affordability is ideal for a family who needs just a little extra coverage as they raise their young children, or in case they need to pay off loans in the case of one partner's death.

As term life insurance is not meant to be permanent life insurance, in most cases it can only be renewed up until you reach the age of 85 or 95, depending on your state. Aside from that, however, it may be the perfect solution if you do not have any other form of life insurance but do have a spouse or family to worry about, should you pass away.

In many cases, just with almost any other insurance plan, you will need to undergo a basic physical exam in order to qualify for the term life insurance policy. Usually, this is conducted by a nurse employed by the insurance company and is done to make sure that you are insurable. However, the medical exam is not mandated by all companies, as some will accept new policyholders without any type of medical screening other than a simple questionnaire.

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