Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Term Life Insurance

What it is:

Term life insurance is a policy which provides financial coverage during a set amount of time. Often considered the "simplest" form of life insurance, it is best suited for providing coverage or income for a short term and on a limited budget.

How it works (Example):

A term life insurance policy covers the policy-holder up to the age specified in the contract. Should a policy holder die before the term is over, a beneficiary will receive a death benefit. Term life insurance policies may be renewed for a premium at the end of a given term if the policy holder's life should exceed the term.

Term life is less expensive that universal life insurance because it does not build up any equity. You are fully covered during the term of the policy, but you do not receive cash back when the term is over.

To illustrate, suppose Bob has a term life insurance policy that covers him financially in the event of death until the age of 40. Should Bob somehow die before the age of 40, the terms of the policy cover him and pay a financial benefit. If Bob lives past the age of 40, however, his policy will not yield any financial benefit. He must renew the policy for another term under new conditions.

Why it Matters:

Term life insurance is generally considered one of the more inexpensive ways to secure a death benefit. Because term life insurance will expire when the policy holder reaches a certain age, it is important that policy-holders ensure that renew their the policy when it expires.

Term life is popular with young families who need protection, but also need to keep prices low. It is often intended for income-replacement needs.