This is the most basic form of life insurance, and often the least expensive option for those under the age of 50. Term policies are drawn up for a certain number of years, usually ranging from 1 to 10 years. They are renewable at the term’s end, but as the policyholder ages, the premiums will increase with each renewal.
There are several variations of term insurance, each with the same basic idea. One is a level term policy, in which the annual premium will be locked at a set amount for up to 40 years, depending on the insured’s age.
Another common variation, the declining balance term policy, is often used as a mortgage insurance. It’s set up to match the amortization schedule of the insured’s mortgage principal. The premium remains constant over the term of the policy, but the face value, or the policy’s original death payout, will decline throughout the term. Once the entire mortgage balance is paid up, the policy expires as the insurance is no longer necessary. A third takeoff of term insurance is a return of premium term policy. This policy offers to repay all of your premium payments if you outlive your insurance’s term. By purchasing this kind of insurance, your premiums are guaranteed to stay in your family – either as benefits to your dependents or as money back in your own pocket.
One major caveat of term insurance is that the policies have no cash value; they are pure insurance. Benefits are only paid if the policyholder passes on during the policy’s term. At the term’s end, the policy will expire and no benefits will be paid in case of death unless the term is renewed. If you are considering term insurance, be sure to purchase a policy that is renewable up to an age when you think you will no longer need insurance.