Term Life Insurance

Term life insurance, as the name suggests, provides life insurance only for a limited period of time, or "term." Other types of policies, such as whole life or universal life, are considered to be "permanent" insurance, and are designed to provide protection for the entire life of the insured.

Term insurance might be compared to an automobile insurance policy. While the auto policy is in force, the insured enjoys protection against loss from an auto accident. If no accident happens, no benefits are paid under the policy. At the end of the period covered by the policy, there is no refund of premiums paid. Term life insurance works in much the same way.

Term insurance thus provides only "pure" insurance protection and does not have the cash value feature typically found in most permanent life insurance policies. Unlike most permanent policies, in which premiums usually remain level over the life of the policy, the periodic cost of term life insurance increases as the insured becomes older. The cash-value feature found in permanent policies provides a cash build-up within the policy which allows for the level periodic premium. In later years, the premiums for a typical term life policy will far exceed those of the typical permanent policy.

Common uses of term insurance

Term Life insurance is most useful when an insured is relatively young and the need is for temporary or short-term coverage. Some common uses of term insurance include:

• Family Protection: To provide the funds to support a surviving spouse and/or minor children or to provide the cash for a child's college education or pay for other capital needs; to pay final bills such as medical or other estate expenses, as well as federal and state death taxes.
• Declining Needs: In some instances, a debt, such as a mortgage, is matched with a decreasing term policy. As the debt is paid off, the policy's death benefit is reduced.
• Business Planning: A business may use term insurance to insure a key employee, or to recruit or retain key employees through a salary continuation plan. Term insurance is also used to fund a cross-purchase buy-sell agreement, particularly where one owner is significantly younger than another.
• Charitable Gifts: To provide funds for a gift to charity.