How Term Life Insurance Works
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How Term Life Insurance Works
Term life insurance provides coverage at a fixed rate of payments for a limited term. Once the term is up, you no longer have coverage and must reapply for it. However, the premium you once paid is not guaranteed, and you may have to satisfy more stringent conditions in order to qualify for coverage again. This proof of insurability, as it is called, can be a challenge as you get older if you have medical conditions.
Things To Know
- If you die during the term, your beneficiary will receive a death benefit.
- If you do not die, no death benefit will be paid at all.
If you die
If you die during the term that is covered, your beneficiary will receive a death benefit. If you do not die, no death benefit will be paid at all (unlike with whole life insurance). This fact leads some to liken term life insurance to paying rent as opposed to owning your home.
Term vs. whole life
Term can be contrasted with the other form of life insurance, called permanent (or whole) life.
A permanent life insurance policy covers you for life as long as you make your premium payments. The most traditional form of permanent life insurance is whole life. Once you are approved for the policy, the insurance company cannot cancel the policy, and the cost of your payments will not go up, because it averages insurance costs over your lifetime. This means that over time the policy develops a cash value, which is a reserve the insurer accumulates in the early years so there will be sufficient money in later years to pay the promised death benefit, while keeping the premiums level.
Premiums for whole life policies are at first higher than those for term, but over the long run can end up lower and sometimes much lower.
How payouts work
Proceeds from a term policy may be paid out as a lump sum or as an annuity. An annuity is paid over time in regular payments, either for a specified term or over the beneficiary’s lifetime.