Term insurance is a life insurance policy that you agree to a monthly payment for a fixed number of years, usually 5 to 20. The rate doesn't change and you can cancel at any time without any penalty.
If the insured person lives longer than the term of the policy, the policy is no longer in effect. Nothing is paid to the policy holder. The insured person builds up no equity (cash value) in a term policy.
Term life insurance is the least expensive form of life insurance. It is commonly used when a person needs temporary protection or doesn't want to pay the higher premiums for the other kinds of life insurance. Another reason some are advised to purchase term life insurance is the prospect of investing elsewhere the difference between the term policy and a permanent cash value policy. This strategy may or may not be the best for that particular individual. I don't recommend purchasing term insurance and investing the difference elsewhere. I believe in keeping things simple. Just buy the proper type of insurance coverage for you and forget about getting tricky. There's too much temptation to use the money saved from the lower premium for something other than an investment.
Term insurance comes in several forms. There is renewable and non-renewable. Non-renewable means that when the policy expires you must re-qualify usually by taking another physical and filling out another health questionnaire. On the other hand, with renewable term, you automatically re-qualify to continue your policy. I don't recommend that anyone ever purchase non-renewable term. There is also convertible and non-convertible term insurance. Convertible term means that the insured can convert his term policy to a permanent policy such as whole life, universal life, or variable life. Non-convertible term means that you can't convert the policy to another form of life insurance. I recommend that you always purchase convertible term.
Term insurance comes in two other forms which are not as easy to determine which to purchase. These two types depend on the individual circumstances of the insured. The first of these is Level Term Insurance. Level term insurance provides a specified amount of coverage for the entire period of the policy. For instance, a five year level term life insurance policy in the amount of $250,000 will pay $250,000 at any time during the course of the policy, should the insured die while the policy is in effect.
There is also Decreasing Term Life Insurance. Decreasing Term Life Insurance pays a sum of money which decreases over the period of the policy. One would purchase decreasing term insurance if the financial needs of the insured decrease over time. For example, if one might purchase decreasing term insurance for protection when their children will be grown and out of the house in a few years.
There is one other very important thing to consider when purchasing term insurance. That is, the quality of the insurance company you're purchasing it from. Many times, a person's needs change over time. It may have made sense to purchase a term life insurance policy when you did. However, with the passage of time, the insured needs may have changed. As a result, when the term policy is soon to expire, the insured may want to continue with life insurance coverage, but of a different nature.
When purchasing term insurance, investigate the company's permanent policies (whole life, universal life, and variable life). The reason for this is quite simple and sound. If you buy a convertible term policy and seek at some point to convert it to a permanent policy, you will want to be able to convert it to a good permanent policy. It's fine to shop around for the best price for term insurance. But when shopping for a term policy, compare the permanent life insurance products the different insurance companies sell.
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