While about 70 percent of life insurance plans sold in the United States are whole life insurance plans, many people just do not understand what is term life insurance. Term life insurance definition; in its most basic form, is a contract between a policyholder and an insurer that might include one or two other parties: the named insured and the beneficiary. The contract is in effect for a set number of years and then simply expires if the named insured outlives the term for which coverage is written.
Term life insurance was the first kind of life insurance ever created and is considered by many insurance experts to be the purest form of life insurance sold. A term typically lasts from 10 years to 30 years with many policies also available for 15, 20 or 25 years, depending on the insurer and options offered. The person whose life is insured is the “named insured” and might be the policyholder, a spouse, family member or business partner. Term life insurance or any other kind of life insurance cannot be underwritten for someone who has no prior relationship with the policyholder, which is why policyholders may only insure themselves, spouses, family members or business partners.
The policyholder typically pays all premiums, and rates for term life insurance plans are the most affordable of all life insurance options. The reason term life is such a good deal is due to two primary factors. The first is that it does not grow cash value over time like a whole life insurance plan. Instead, it simply provides a
set level of coverage for a predetermined number of years and then simply expires if the named insured outlives the term.
The second reason term life insurance plans are very affordable is due to the fact the vast majority of policies do not result in a death benefit being paid. Studies show as much as 99 percent of term life insurance plans do not wind up paying a death benefit, and that means the policies are a low risk for insurers. Because so few plans pay a death benefit, there is no medical exam required to buy a policy, and premiums remain the same throughout the term.
Many insurers will issue a $250,000 term life insurance policy for as little at $15 per month, which is more than 10 times less than what whole life insurance plans would cost for the same amount of coverage. Insurers base premiums on the age of the named insured when the policy is first drawn, their relative health, whether or not they smoke tobacco products and compare the results to mortality tables, which tell life insurers the odds of the insured individual dying while the policy is in force.
Term life insurance generally is used to help protect temporary financial obligations, such as raising children, paying a home mortgage or paying for college tuition. And because rates are so low, many investment advisors suggest purchasing term life insurance plans to cover financial obligations and then using what otherwise might be spent on a comparable whole life insurance plan to invest in order to build retirement income.