A life insurance policy is a promise by an insurance company to pay the beneficiary a specific amount of money when the insured die in exchange for timely payment of premiums. Life insurance companies generally offer two basic types of policies – term life and permanent life. Term life is the simplest in structure and favored by most people today because of cost. Term life insurance provides coverage for a specific period or term. It is sometimes referred to as temporary insurance. The policy pays cash benefits to the beneficiary if death occurs within the specified period or term. Term insurance provides protection for a specified period of time. The insured must die within the specified period for the beneficiary to be paid the benefit. If the policy is not renewed on the expiration of the specified period or term, the coverage ceases. There are no cash benefits if the death occurs after the coverage ceases. A term life insurance policy has no financial investment value and most of the premium goes to pay for the coverage.
There are a variety of term life insurance policies. The more common ones are:
- Annual Renewable: An annual renewable term insurance is automatically renewed each year up to a specific age limit, often 65, but sometimes older.
- Renewable: A renewable term insurance can be automatically renewed after the expiration of the term of the policy. While the annual renewable term insurance can be renewed on annual basis, this policy can be renewed for a longer period of time. It is costlier than annual renewable insurance policies.
- Level Premium: A level premium term insurance guarantees your premium will stay the same level every year during the term of your policy.
- Decreasing Term: In a decreasing term insurance, the premium remains constant during the term but the cash benefit decreases every year.
- Convertible Term: In a convertible term insurance, it is possible to convert the term policy into any other type of policy offered by the insurance company.
- Accidental Death: Accidental death insurance is special limited type of term insurance that pays out a cash benefit if you die in an accident.
Term life insurance is less expensive than permanent life insurance and provides death benefit protection for specified periods of time ranging from 1 year to 25 or 30 years and some even up to age 65, age 80 or age 90.
