What Is Term Insurance And How Does It Work?

What Is Term Insurance And How Does It Work

Term insurance is a form of life insurance that provides benefits only for a specific period of time. We can even define it as insurance that works for a specific term of years. If the insured person dies during the set time period in the policy then death benefits are paid. If we compare it to permanent life insurance then it is much less expensive. It differs from other types of permanent insurance as it doesn’t offer cash value. The only benefit it offers is the guaranteed death benefit from term policy.


Term Insurance In Detail

There are multiple types of term insurance policies available. Multiple policies provide level premiums for the time period of the policy. It may be ten or twenty or thirty years. These policies are called “level term” policies. You have a paid premium that is a specific amount on a monthly basis. Insurance policies charge a premium in order to provide benefits.

Also read: What Does Term Life Insurance Cover?[Complete Guide]

For the calculation of premium, the insurance company needs to examine a few factors. They consider their health, life expectancy, and age. You will have to go through a medical exam. It will help the insurance company in finding your current health status. Also, they would ask for your medical history depending on the policy you choose.

The premiums are usually fixed and you need to pay them as long as the term exists. If the policyholder dies prior to the policy’s expiration then the company payouts the face value. In case, the policyholder dies after the policy expires then there will be no payout. There is a provision to renew the term insurance. So they can extend the term insurance after it ends. However, the new premium will be based on the time of renewal. You will have to go through an examination to get benefits accordingly. So you should expect higher premiums as with age health problems increase.


Let’s Understand With An Example

A 20-year term policy has a payout of $200,000. Now, the premium for a 30-year-old will be around $20 per month. On the other hand, someone of age 50 will pay a premium more $40. We are just giving a rough scenario. It is obvious that companies differ in their rates. So you may have to pay less or more depending on policyholder’s health.

Let’s consider that the 30-year-old one dies after the policy expires. So he or she won’t receive any benefit from it. They have to renew their policy the time it expires.


Why do You need To Buy Term Insurance?

People purchase term insurance to replace the income source after you die. Consider, you and your family own a single house that is on the mortgage. Now, if the sole earning member dies the other members need to pay debts. To safeguard your loved ones from such problems you must choose term insurance. After the policyholder’s death, the company will pay out the benefits. Due to its low cost, a lot of people prefer term insurance over other types of insurance.

Also read: Is an accident covered in term insurance? [Ultimate Guide]

One thing that you need to understand is that you are not paying premiums for payment later on. The principal focus is peace of mind. You can keep your family financially stable even after your death. The death benefits do not come with an assigned use. You will mainly use them for the funeral, mortgage, or even replacement of income. It is totally the beneficiaries’ choice of how he or she wants to use them.


Are There Any Types Of Term Insurance?

There are different types of term insurance for you. The best one depends on your individual circumstances.


#1: Level-term policies

This policy will provide coverage for a time period of 10 to 30 years. From premium to death benefit, everything is fixed. The risk increase with years so the premium is comparatively higher. They will provide you an effective policy only at higher premiums.


#2: Yearly-term policies

These policies do not come with a fixed term. You can renew them each year without providing any sort of evidence of insurability. With an increase in age with each passing year, the premiums will change. Premiums are relatively expensive for individuals so they do not prefer this policy.


#3: Decreasing Policies

Just as the same suggests these policies come with declining benefits. The declining schedule is also predetermined. You will pay a fixed amount for the complete duration of the policy. These are mainly used in context with a mortgage. To match the decline in the principal of the home loan.


Final Words

Term insurance attracts young people with children. They want to safeguard their families and provide a large amount of coverage. It is true that after the death of parents there is nobody who can take care of their children. They need some sort of support to keep going. That’s why term insurance is quite important. These policies are even important for those who are looking for support for a limited period. The policyholders calculate the amount of time it will take for them to become financially sound. So they buy term insurance for that much time period. By the time the policy expires they know they are financially sound.

There is also a group of people who don’t opt for term insurance. The reason being the death benefits only. People don’t want to lose their money as they cannot predict the future. It concerns them that if nothing happens to them the money will go wasted. If you are financially sound to avail of the benefits of other insurance then go ahead with it. Otherwise, term insurance is not a bad investment and companies like MetLife and Prudential Financial provide great plans. We have shared information on other types of insurance too. Even if you don’t choose a term, you can choose other health insurance policies. They come with a different set of benefits.

In case, you are doubtful about this topic then you can share them through comments. We will try to revert as soon as possible with answers to your queries.