What Is Term Life Insurance?

What is term life insurance? Term life insurance is a product that you may want to consider while you are planning your estate because it is a simple, affordable way to provide financial security for your family in the event of your death.

Some of life's big events are joys to plan for: graduations, weddings and the births of our children are wondrous things and almost everyone plans for them eagerly. However, one of life's biggest occurrences, death, is very difficult to even think about, yet alone plan for. Unfortunately, it is necessary to do so for the sake of our loved ones.

Good planning will not ease their grief but it will allow them to mourn and recover from their loss without having financial constraints that lead them to worry about losing their home, their educational opportunities or their chance to pursue their dreams.

What is term life insurance?
Term life insurance is an insurance policy that will pay a lump-sum benefit to your family or another beneficiary of your choice, if you die while the policy is in effect. Term life insurance is a temporary policy, meaning that the policy is purchased for a specific term, after which it expires.

Who should consider buying term life insurance?
Anyone with dependents, such as spouses, children or other relatives that they support financially, should consider buying term life insurance. If you don't have any dependents, but do have debt, you may want to consider having a policy so that your estate will be able to clear your debts and pay any taxes owed. This will allow your heirs to inherit the property that you intended them to have.

What types of term life policies are there?
There are two main types of term life insurance policies:

Annual renewal term: This is just what it sounds like: you will need to renew your policy annually (or, in some cases, every two to five years). Each time you renew your policy, your premium will be recalculated based on your age, health and other factors. This means that your premiums will increase every year, dramatically so if you develop any new health problems. This is a good option to consider if you are young, healthy and need the most affordable coverage that you can buy.

Level term: With this type of coverage, your premiums will not increase during the duration of your policy term (this could be 5, 10, 20 or even 30 years). Accordingly, the premiums will initially be higher than they would if you were to buy an annual renewal policy, but by the end of the term they would be much lower than they would be if you had renewed your premiums annually over the same term.

How much coverage should you get?
When deciding what dollar amount of coverage to get, the general rule of thumb is that you should purchase about ten times your annual income. For example, if you make $50,000 a year, you should get about $500,000 of coverage. If your spouse or other dependents have unusually high expenses or a lot of debt or will be unable to generate their own income, you will likely need more coverage. You are likely to need less coverage if you live in a house that you own, have little debt and have dependents who are able to generate significant income on their own.

The length of term you should purchase depends on your financial and personal situation. Someone with young children, 25 years left to pay on a 30-year mortgage, lots of student loans and other debt that will take years to pay off should consider a much longer insurance term than someone whose children are almost grown and who has little debt and adequate retirement savings.

How are term life insurance premiums determined?
Life insurance premiums are based on many factors, including the applicant's age, health, credit rating, hobbies, occupation and whether or not they smoke. If you apply for life insurance, you may have to get a physical, during which you will be screened for all sorts of possible heath problems. You will also have to fill out an application form that has detailed questions about your health and lifestyle. Your answers to these questions and the results of your physical will be used to determine how much you have to pay in premiums in order to buy the amount of coverage that you want.

No matter what type or amount of term life insurance you decide to purchase, you must remember that it is very important to buy your coverage from a reputable, financially-stable insurer who will be around to help your loved ones when you cannot.