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How does term life insurance work?

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asked Jan 14, 2013 by anonymous

1 Answer

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Term life insurance is a special type of life insurance policy that is only effective for a limited amount of time. Such policies can be purchased for any length of time, and conventional policies are available for 1, 5, 10, 20 and 30 years. Other terms are available and can be negotiated with your insurance agent or company. Typically, the shorter the term of the policy, the higher the premiums will be, because insurance companies have to compensate the expense of handling short-term policies.

A major difference between term and permanent life policies is that permanent life policies offer some form of return on the investment while term policies expire without any payout if you outlive the term of the policy. Another major difference between term and permanent life insurance policies is that most permanent life insurance policies include some form of financial vehicle. This might include the ability to borrow against the accrued value of the policy, or the ability of the policy owner to choose how the premiums are invested, among other things.

Some term policies can be extended or converted after expiration, but the rates will be higher than the initial term of the policy. In the case of a long term policy, the premiums after conversion could push the premiums beyond the level of being affordable. Similarly, if you have developed any medical conditions while insured under a term life policy, those will be considered preexisting conditions during the conversion or extension process. This means that when it comes time to renew the policy you may not even be eligible for the same level of coverage.

Term life insurance is useful for many things, but not everything. It makes more economic sense to purchase a term life policy to protect your mortgage, for example, but a permanent life insurance policy is more appropriate for long-term goals like leaving an inheritance for your children or paying for your own final expenses. Before you purchase a term life policy, take a close look at the benefits and disadvantages, and then purchase the policy which best fits your needs.

answered Jan 14, 2013 by anonymous
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