Define Term Life Insurance

Term life insurance provides coverage that is in force temporarily. Coverage for the insured lasts only for the length of the term. If the term is defined as 20 years, the policy will pay the death benefit to the beneficiary if the insured dies at any point during the 20 years. However, if the insured is alive at the end of the term, the coverage ends. Term policies can be renewed for another term policy at the end of the term, but most insurance companies recommend converting a term policy to a permanent policy.

Life insurance agents often define term life insurance policies as affordable, temporary insurance best for young couples. Term insurance premiums are low because they are applied only to the death benefit that is paid to the beneficiary. Young married couples in particular, especially those with debt, are often urged to purchase term life insurance to protect against the loss of income in the event of the death of one spouse. The death benefit of a term policy can be in an amount large enough to cover mortgage payments, car payments, student loans and credit card bills along with funeral and burial expenses.

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Death Benefit

The death benefit paid on a term life insurance policy is almost always free of state and federal taxes. (Term life insurance applicants are always advised to check with a professional tax planner or insurance agent with knowledge of the tax laws of the state in which the policy is purchased.) Further, and maybe more importantly, the death benefit does not have to go through probate. That means it is paid to the beneficiary immediately upon the filing of the claim without becoming part of the estate. The only exception to this rule is if the named beneficiary is the estate and not an individual.

The death benefit paid on term life insurance policies can also be used to pay inheritance taxes. Depending on current federal tax law and to what extent inherited assets will be taxed, the death benefit can prevent the need to sell valuable assets quickly or for less than they are worth. This can help parents pass assets such as equities, bonds and property from one generation to the next.

Term Life Insurance Policies Based on Length of Term

The length of a term life policy can be defined for as short as one year to as long as 20 years. Some insurance companies will issue term policies for longer than 20 years, but not very many. Further, term life insurance policies are typically not issued to those over the age of 80.

A policy with a term length of one year is known as an "annual renewable term" policy. Coverage is in effect for 12 months and must be renewed at the end of the year. This type of policy offers the truest cost of insurance. In other words, the amount of the premium is the most accurate cost of providing insurance to the insurance at the age he or she is at the time the policy is written. If renewed at the end of the year, the cost of the premium will increase, as the insured is now one year older than he or she was at the beginning of the prior term. While term life with an annual renewable term can be beneficial in some instances, it is the least cost effective way to purchase term life insurance.

To define term life insurance with a level benefit, one must first define "benefit". In this instance, the benefit is the death benefit that is paid to the beneficiary upon the death of the insured. A level benefit means that the death benefit will neither increase nor decrease during the length of the term. Whether the insured dies during year six or year 16 of a 20-year term policy, the death benefit will be the same. The premiums, however, will more than likely increase every five years.

A term policy with level premiums is usually just the opposite of a level benefit policy. The premiums decrease throughout the length of the term, as does the death benefit. This policy is often best for those who simply want to cover outstanding debt that decreases over time, such as a mortgage.

Term Life Insurance with Return-of-Premium

A return-of-premium term life policy returns some or all of the premiums to the insured if he or she is still alive at the end of the term. With a standard term policy, unless the insured dies and the death benefit is paid to the beneficiary, the insurance company does not make a payment on the policy. For some policy owners, the risk of losing thousands of dollars worth of premiums over the course of the term seems like a bad investment.

The amount of the premium that is returned at the end of a return-of-premium policy will affect the price of the premium while the policy is in force. However, for some policy owners, the risk of paying higher premiums in order to have them returned is money well spent. Applicants considering a return-of-premium policy should always compare the yield on the policy to the yield on other investments.

Differences Between Term Life and Permanent Life

Whereas term insurance is defined as temporary insurance, permanent insurance is in effect for the life of the insured. As long as he or she pays the premiums when due in the amount specified, the policy covers the insured for as long as he or she is alive. Permanent insurance is recommended for older couples that need to protect not only against the loss of one income, but also the assets they've accumulated.

Permanent insurance policies include whole life, universal life and variable life. The premiums on any kind of permanent policy are usually more expensive than those on a term policy. And, a permanent policy cannot be cancelled as easily and inexpensively as a term policy.

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