Term life insurance, also known as pure life insurance, is an insurance that guarantees payment of a stated death benefit if the covered person dies during a specified term. Once the term expires, the policyholder can either renew it for another term, convert the policy to permanent coverage, or allow the policy to terminate.
Term life insurance guarantees payment of a stated death benefit to the insured's beneficiaries if the insured person dies during a specified term.
These policies have no value other than the guaranteed death benefit and feature no savings component as found in a whole life insurance product.
Term life insurance is attractive to young people with children. Parents may obtain large amounts of coverage for reasonably low costs. Upon the death of a parent, the significant benefit can replace lost income.
Types of Term Life Insurance
- Level term or level-premium policies
These provide coverage for a specified period ranging from 10 to 30 years. Both the death benefit and premium are fixed.
- Yearly renewable term (YRT)
These policies have no specified term, but can be renewed each year without providing evidence of insurability. The premiums change from year to year; as the insured person ages, the premiums increase.
- Decreasing term policies
These policies have a death benefit that declines each year, according to a predetermined schedule. The policyholder pays a fixed, level premium for the duration of the policy. Decreasing term policies are often used in concert with a mortgage to match the coverage with the declining principal of the home loan.