What is Term Insurance?
Of the many different types of life insurance available to consumers, term life insurance is generally regarded as the most inexpensive of the lot. In general, a life insurance policy pays a monetary benefit to the named beneficiary upon the death of the insured. Popular types of insurance include: whole life, variable life, and term life. While part of the premium in a whole life or variable life insurance policy goes into an investment fund, no part of the premium in a term life insurance policy is used for investment purposes. In short, the premiums in a term policy pay for the insurance.
Term policies are by far the cheapest form of insurance--at least in the beginning. For instance, a 30-year-old, non-smoking male, may pay $2,500.00 a year for a whole life policy with a death benefit of $250,000.00. However, the same policy in term form may only cost $300.00 per year. However, the whole life policy premium never increases over the years and also carries a cash build-up which can be used or borrowed at any time. The premiums on the term policy will increase as the insured grows older. For instance, when the 30-year-old male has his 70th birthday, his annual premiums for that same term policy may be $12,000.00 per year, instead of the paltry $300.00 when the policy was first ordered.
Many consumers prefer term insurance to provide their families with the security needed, and then use the additional funds they would have paid into a whole life or variable fund to make investments of their own choosing. Accordingly, they too are acquiring life insurance and using funds for investment purposes (IRA, college fund, second home savings), but they're simply using their funds in a different way, a manner that suits their personal needs.
As with most insurance plans, with a term life plan the insured will still have to undergo a basic physical exam conducted by a nurse (including blood work) to make certain they are insurable. The policy will remain in effect for as long as the premiums are paid. Term policies come in many varieties. However, the most popular models are annual, 10-year, and 20-year policies. Annual term policies carry a premium that increases slightly each year, while 10-year and 20-year term policies carry premiums that remain the same for 10 or 20 year periods at a time.