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What Is Term Life Insurance
The definition for Term Life Insurance is simple. You pay a premium for a period of time (the term) from one to thirty years and if you die during that time the insurance is paid to the person or persons you designate to receive it - called the beneficiary(ies).
It covers you for a specified period of time (usually from 5 to 30 years, you choose). If you purchase a $1,000,000 term life insurance policy for 20-year period and you die in any of those 20 years, your beneficiary receives the million dollars.
If you are still living at the end of the term, your insurance policy is over unless you can renew the policy. When you renew (assuming your policy has that feature) it will renew at a higher price reflecting your now older age. Term insurance has no buildup of cash as with whole life insurance.
Term life insurance is usually the most affordable form of life insurance. Term life insurance does not build cash value.
Because term insurance is temporary in nature it's primary use should be to provide for covering temporary financial responsibilities of the insured. Such responsibilites may include but are not limited to Consumer debt, Dependants requiring income, college education for dependants and mortgages.
Annual renewable term
The simplest form of term life insurance is for a term of one year. The death benefit would be paid by the insurance company if the insured died during the one year term, while no benefit is paid if the insured dies one day after the last day of the one year term. The premium paid is then just the expected probability of the insured dying in that one year plus a cost and profit component for the insurer. Since the likelihood of dying in the next year is low for anyone that the insurer would accept for the coverage, purchasing one year of coverage is not generally done, nor cost effective. A variant that is commonly purchased is annual renewable term (ART). In this form, the premium is paid for one year of coverage, but the policy is guaranteed to be able to be continued each year for a given period of years. This period varies from 10 to 30 years, or occasionally until age 95. As the insured ages the premiums increase accordingly and later becomes financially unviable as the rates for a policy would eventually approach the face amoung. In this form the premium is slightly higher than for a single year's coverage, but is much more likely for the insured to have the benefit paid.
Level term
Much more common than annual renewable term insurance is insurance where the premium is the same for a given period of years. The most common periods being 10, 15, 20, and 30 years. In this form, the premium paid each year is the same, and is the cost of each year's annual renewable term rates averaged over the term, with a time value of money adjustment made by the insurer. Thus the longer the term the premium is level for, the higher the premium, because the older, more expensive to insure years are averaged into the premium.
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