Term life insurance provides life insurance coverage for a specific time period (the term). It is often referred to as pure insurance. The face amount of the policy is paid if you die during the term of the policy. When you live longer than the term of the insurance coverage, nothing is paid, as there is no cash surrender value.
Term life insurance is appropriate for situations when there is a high need for insurance but not much cash flow to pay for it. For example, a young family with limited cash resources may have a great need for survivor income to provide for living expenses and education needs. Term life insurance is especially helpful here, as it allows the family to buy the maximum insurance protection with minimal cash outlay.
Term life insurance is also well suited to cover limited-term needs, such as coverage during your working years until you retire, while your children are dependent on you, or for the duration of a loan or mortgage. Term life insurance is also used in business to fund buy-sell agreements and to provide coverage for nonrecurring business debt security and key personnel.
Term life insurance is generally the most efficient way to achieve maximum life insurance protection for a minimum current cash outlay. When you are young and just beginning your career or family, you may have a need for insurance but not much cash to pay for it. With a term policy, you can buy a larger death benefit for less cash than you could get with any other type of life insurance policy.
Term life insurance is also pretty flexible. You can buy term insurance coverage for the time period that best suits your needs. Common term periods are 1 year with an automatic and guaranteed renewal each year (at a higher premium) up to age 95 in some states, or a level premium for periods of 5, 10, 15, 20, 25, or 30 years.
The main disadvantage of term life insurance is that a term policy has an end point, like an expiration date. When the coverage period ends, you may have the option to renew the policy, depending on the specific policy and with limitations. But each time you renew the policy for an additional term of coverage or buy a new term policy, the rate increases because your age (and consequently the insurance company’s risk of paying the death benefit) has increased. Eventually, the premiums can become quite high and difficult for people to pay. In addition, some states limit the age at which a person can buy life insurance. If you live in one of those states and want coverage beyond the allowable number of years (generally age 70), consider purchasing a permanent (cash value) policy such as a whole life, variable life, universal life, or variable universal life policy. Even if your state allows you to continue your term insurance policy to age 95, a cash value policy may, in the long run, be less expensive than a term policy.