A term life insurance policy is the simplest, purest form of life insurance: You pay a premium for a period of time – typically between 10 and 30 years – and if you die during that time a cash benefit is paid to your family (or anyone else you name as your beneficiary).
When you outlive your term policy, you will no longer have life insurance coverage—but you can convert to a permanent policy or buy new term insurance.
Term coverage only protects you for a limited number of years, while whole life provides lifelong protection—if you can keep up with the premium payments. Whole life premiums can cost five to 15 times more than term policies with the same death benefit, so they may not be an option for budget-conscious consumers.
Term life insurance guarantees payment of a stated death benefit to the insured's beneficiaries if the insured person dies during a specified term. These policies have no value other than the guaranteed death benefit and feature no savings component as found in a whole life insurance product.
Term life policies are generally sold with terms of five, 10, 15, 20, 25 or 30 years. You won't find, for example, an eight-year life insurance policy.
The cash value of a life insurance policy works like an investment or savings account and grows tax-deferred over the life of the policy. You can take out a loan against the cash value, surrender your policy for the cash, or use it to pay your premiums once it reaches a certain amount.
What happens to my premiums when the policy expires? At the end of your term, coverage will end and your payments to the insurance company will be complete. If you outlive your term life insurance policy, the money you have put in, will stay with the insurance company.
If you outlive your policy term, you get your money back, unlike with regular term life insurance. It's much more expensive than regular term life insurance. The returned money isn't taxed since it's not income, but simply a return of the payments you made. You don't earn interest on the money returned to you.
Typically, term life insurance benefits are paid when the insured has died and the beneficiary files a death claim with the insurance company. ... The default payout option of most term life policies remains a lump sum check.
Term Life Pros & Cons
| Pros | Cons |
|---|---|
| Lower premiums when you're younger | It's temporary coverage |
| Beneficiaries will receive larger death payouts | Must re-qualify at the end of the term |
| Can be converted to whole life insurance | Difficult to qualify if there is a significant health issue |
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