Term Life Insurance

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What Is Term Life Insurance?

Term life insurance, also known as pure life insurance, is a type of risk coverage policy that provides a death benefit to the policy's designated beneficiary for a specific period. The primary aim of this insurance is to ensure that the beneficiary receives timely payments in the event of the insured person's death within the specified term.

Term life insurance includes various policies based on its tenure. On expiry, a person can renew or change its structure. It is more popular among youngsters, providing attractive premium options and numerous tax benefits. However, it does not include an investment component, so the policy has no accumulated value.

What Is Term Life Insurance?

Term life insurance, also known as pure life insurance, pays out a death benefit to the beneficiary if the policy owner dies within the policy's specified term.
Several types of term insurance are available, including level, increasing, decreasing, convertible, return of premium, and yearly renewable life insurance.
One disadvantage of term life insurance is that the policy's face value doesn't appreciate over time. However, the death benefit remains the same regardless of how long the policy has been in force.

How Does Term Life Insurance Work?

Term life insurance is a kind of life insurance policy that covers a particular period, commonly 10, 20, or 30 years. Throughout this period, the policyholder pays regular insurance premiums to the insurance company for the coverage.

Suppose the policyholder dies while the policy is active. In that case, the insurance company pays a tax-free lump sum of money, known as the death benefit, to the beneficiaries mentioned in the policy. The beneficiaries can use this death benefit for various purposes, including settling debts, meeting daily expenses, or investing in the future. Typically, the policyholder decides the amount of the death benefit, which can be adjusted with time.

If the policyholder outlives the policy's term, the coverage ends, and the insurance company doesn't provide any benefits. However, some policies may offer a conversion option, allowing the policyholder to convert the term life insurance policy into a permanent life insurance policy without the need for additional underwriting.

In essence, it provides temporary coverage for a specific period at an affordable cost. Therefore, it can be an essential tool to financially protect one's loved ones in the event of an unforeseen death.

Types

Level Term Life Insurance: Provides a constant sum to the beneficiary upon the policyholder's death, with a term of 10 to 30 years.
Increasing Term Insurance: Allows policyholders to increase the sum assured with a fixed rate and the option to extend the tenure.
Decreasing Term Insurance: The benefit amount decreases as the policyholder grows older, with a lower premium for those with loans or EMIs.
Convertible Term Life Insurance: Can be converted to a different policy type, usually when financial situations change.
Return of Premium Plans: Offers a savings option, refunding all premiums paid if no claim is made.
Yearly Renewable Term Insurance: Allows policy renewal with a higher premium as the policy owner ages.

Eligibility

The eligibility criteria for accessing term life insurance are the following:

Age: The limit for term insurance is at least 18 to a maximum of 65 years. Depending on the age, the premium rate will be applicable.
Medical Tests: A medical requirement is necessary for every insurance policy. Likewise, detailing all the medical reports and health issues is a must. Otherwise, the beneficiary will not receive any benefits or sum assured.
Income-Related Details: The insurer will ask for income-related details for record purposes for term insurance. In addition, it also helps them decide on the premium rate. However, there is no minimum income requirement.
Citizenship And Bank Documents: Individuals must submit all the documents relating to citizenship, like photographs, identity, and address proof. Similarly, income slips and related documents must be submitted by the policyholder.

Examples

Let us look at the examples of term life insurance for a better understanding:

Example #1

Nicholas is a corporate employee working in a marketing agency. His family consists of his wife, a son, and a daughter. However, the Covid-19 pandemic situation brought a threat to his life. Thus, he decides to go for term life insurance with a return of premium plans. According to this plan, he has to pay a premium of $21.25 monthly for ten years. So, if, by chance, he dies, his son-daughter will receive the death benefit payment. But, he outlives the policy tenure. As a result, Nicholas receives the premium amounts. However, if he had died, the beneficiaries would receive the amount.

Example #2

Let's say Sarah is a 25-year-old single woman with no dependents. She has just started her career and has minimal savings. Sarah realizes that life is unpredictable and that anything can happen at anytime. Therefore, she decides to purchase a 30-year term life insurance policy with a death benefit of $250,000.

Sarah pays a monthly premium of $25 for the duration of the policy. By purchasing a term life insurance policy at a young age, Sarah locks in a low premium rate for the duration of the policy term, making it a cost-effective way to secure her financial future. Additionally, as Sarah's life changes, she can re-evaluate her insurance needs and adjust her policy accordingly.

Pros And Cons

Pros

Cheaper premium rates compared to other types of life insurance.
Provides maximum coverage during the policy term.
Easy to understand as the benefit is clear on death.
Provides tax-free benefits to the insured.
Zero penalties for canceling.

Cons

No extra return on investment.
No appreciation in payout value.
Not suitable for retirement or long-term savings.
No maturity benefit.
Only suitable for a limited age range.

Term Life Insurance vs Permanent Life Insurance

Basis	Term Life Insurance	Permanent Life Insurance
Meaning	This insurance allows the insured to transfer the policy benefits if the death occurs within a specific period.	This policy lasts till the time the policyholder lives.
Purpose	To transfer benefits to the beneficiary on the death of the insured.	To protect the policyholder till death and later to the beneficiary.
Tenure	10, 15, 20, or 35 years.	The whole life of the policy owner.
Types	Level, return of premiums, increasing, decreasing, convertible, and yearly renewable insurance.	Whole and universal life insurance.
Payment criteria	If a policyholder dies within the policy period.	Issues payment after the death of the insured.

Frequently Asked Questions (FAQs)

Does term life insurance have an appreciated cash value?

No, term life insurance has no cash value that appreciates over time. The premiums paid for this policy go towards providing coverage for the insured for a specific term, typically between 1 and 30 years. The beneficiaries receive the death benefit if the insured dies during the term. However, if the insured outlives the term, there is no payout, and the policy expires. Therefore, unlike whole life insurance, term life insurance does not accumulate a cash value that the policyholder can access.

What is the difference between whole and term life insurance?

Term life insurance provides coverage for a specific period, with a payout to beneficiaries if the insured dies during the term. In contrast, whole life insurance is a permanent policy that covers the insured's entire lifetime and includes a cash value component that grows over time. As a result, whole-life insurance is more expensive but offers lifelong coverage and additional benefits.

What happens if you stop paying term life insurance?

If you stop paying premiums for term life insurance, the policy will generally expire, and you will no longer be covered. Some policies have a grace period of 30 days to make up missed payments. However, the policy will be canceled if you don't make payments by the end of the grace period.