Term Insurance
Term insurance is a type of life insurance policy that provides coverage for a specified “term” or period of time. If the insured person dies during the term, a death benefit is paid out to the policy’s beneficiaries. If the insured person survives the term, the policy simply expires without any value or payout, unless it is a “return of premium” term policy, in which case the premiums paid over the term are returned.
Here are some key features and considerations of term insurance:
- Temporary Coverage: Term insurance is temporary and does not typically build cash value or equity. It’s purely a “death benefit” coverage.
- Affordability: Term insurance tends to be more affordable than permanent life insurance policies, like whole or universal life, especially when purchased at a younger age.
- Term Lengths: Policies can be taken out for terms like 10, 15, 20, or 30 years. Some policies offer annually renewable terms.
- Fixed Premiums: Many term insurance policies come with fixed premiums for the duration of the term. This means the amount you pay won’t change for the term you’ve selected.
- Conversion Option: Some term policies come with an option to convert them to a permanent life insurance policy (like whole life) without undergoing a new medical examination.
- Return of Premium: Some term policies offer a return of premium option, where if the insured survives the term, the premiums paid are returned.
- Decreasing Term: There are also decreasing term policies where the death benefit decreases over the life of the policy, often used to cover a declining liability like a mortgage.
Example of Term Insurance
Let’s delve into a practical example to understand how term insurance might work in a real-life scenario.
Example: Sarah’s Term Insurance
Background:
Sarah, a 35-year-old software engineer, is married with two young children. She’s the primary breadwinner for her family. She wants to ensure her family’s financial security if something were to happen to her during her prime working years.
Term Insurance Policy:
- Policy Type: 20-year term life insurance
- Coverage (Death Benefit): $1 million
- Monthly Premium: $40
Scenario 1: Tragic Accident
Unfortunately, Sarah gets involved in a car accident and passes away at age 45, ten years into the term.
Outcome:
Sarah’s beneficiaries (in this case, likely her spouse and/or children) would receive the $1 million death benefit. This money can be used to cover day-to-day expenses, pay off debts, cover education costs for the kids, or invest for future needs. The premium payments cease upon her death, and the policy terminates after the benefit is paid out.
Scenario 2: Sarah Lives Past Term
On the brighter side, let’s say Sarah lives past the age of 55, outliving the 20-year term of her policy.
Outcome:
The term insurance policy simply expires. Since her policy was not a “return of premium” policy, no money is refunded. However, for 20 years, Sarah had peace of mind knowing her family would be financially protected if something were to happen to her. If she still feels the need for life insurance coverage at this age, she might consider purchasing another policy, but premiums could be higher due to her older age and any potential health issues.
This example underscores the basic principles of term insurance, illustrating both the protective aspect of the policy and its temporary nature.
