Term Life Insurance

Term life insurance pays out its face value (the value specified on the policy) if the policyholder dies during the period specified in the policy. People may purchase term life coverage for 1, 5, 10, or 20 years. It works best for covering defined costs in the case of death, such as to pay off short-term loans. Younger people also buy term life insurance because of its affordability, perhaps its biggest advantage. Young families, in particular, often need more coverage than they could afford through permanent insurance. Term life can provide fairly large amounts of coverage with relatively low premiums.

However, some people need longer-term coverage to provide for such expenses as a 30-year home mortgage loan or estate taxes imposed after the insured person’s death. Term insurance can play a part in covering certain long-term expenses, if the insurer can design policy options to match the need.

Using term insurance policies to deal with long-term risks poses two serious problems: (1) An insured person’s health may decline to the point that the insurance company will no longer wish to extend a policy for another term. To protect against this problem, a policyholder can consider adding an option to make a policy guaranteed renewable, an agreement in which an insurance company must continue to provide coverage if the policyholder wants it. (2) The premiums of guaranteed renewable term life policies, or any term policy, commonly increase with each renewal. Often the increasing premiums become so high that policyholders decide to drop their coverage, sometimes before the need for the coverage disappears.

Policyholders using term life insurance to protect against long-term risks should consider buying convertible term insurance, which can be changed to permanent coverage. Convertible term life policyholders can switch their coverage as soon as they can afford additional premium costs. Once this switch is made, costs usually remain stable.