Term Insurance Explained

Shopping for high-quality, low-cost life insurance? The most popular life insurance is term life insurance and this is often the type of life insurance provided by your employer in a group insurance policy. It is called term insurance because it covers an individual for a set length of time. At the end of that time, the insurance expires. Term insurance is considered the most inexpensive way to purchase a substantial amount of life insurance for a specified period of time.

Term life policies are usually available in 5, 10, 15, and 30-year increments. The most popular are 15- and 30-year term life policies - these policies are usually started at the beginning of a mortgage in order to pay off the house in case of a spouse or family member's death. Some companies refer to 15- and 30-year term life insurance policies as mortgage life insurance.

If an person purchases a 15-year term insurance policy for $100,000 and the insured person dies within that 15-year period, the beneficiary is paid the full face value of the life insurance policy. The payout is only contingent on the premiums being paid up to date and the policy not expiring before death occurs. So if the insured has been paying the premium on time and it is within the policy term, the beneficiary will receive the benefit payout.

Some policies include a guarantee of reinsurability that would allow an insured that acquired a terminal illness but did not die during the term of a policy to renew for another term regardless of insurability. The new policy premiums will be much higher because of the increased likelihood of death and payout of the life insurance policy during the next specified term.

A term life insurance policy may have exclusions under which the insured will not be covered even if death occurs during the term period of the policy. In many cases, if the insured dies from an excluded activity, the premiums paid into the term insurance policy may be refunded. Always make sure you read your policy completely before signing or paying for premiums.

Some common exclusions include:

• Suicide exclusion - If an insured commits suicide during the first two years of the policy term, the policy will not pay out. This is to deter purchases of term insurance to get out of a difficult financial situation.
• Aviation exclusion - This exclusion applies only to private aircraft and not to passengers on commercial aircraft.
• War exclusion - Many term insurance policies will not pay out a death benefit if the cause of death is due to a war. This exclusion applies to civilian casualties as well.
• Dangerous activity exclusion - If you are planning on skydiving or auto racing, check your policy exclusions to make sure you are covered during an activity that is putting your life at extreme risk.

The term life insurance policy is considered pure insurance protection because premiums, in most cases, are not expected back at the end of the policy term and the policy has no cash value and cannot be borrowed against like whole life insurance policies. There is also term insurance available where you receive your premiums back at the end of the term. Policies that return the premium at the end of the term are not available in all states.

Related topics: Insurance Broker, Group Insurance