How Term Life Insurance Works

Term life insurance policies are sold for a specific number of years. Ten- and 20-year terms are the most common. The "term" in term insurance means the following:

• Number of years your policy coverage lasts. A term life insurance policy's death benefit is only paid if the policyholder dies during the coverage period. If the term ends or the policyholder stops paying premiums, the policy lapses. A lapsed policy is a worthless policy.
  
• Number of years you are required to pay premiums. Term life insurance requires you to pay premiums regularly in order to maintain policy coverage. Term life insurance does not build up cash value the way premiums do for permanent life insurance.
  
• Larger premiums when renewing the policy. When you first buy a term life policy, you may decide you only want coverage for 10 years. Ten years later, however, your circumstances may have changed. You may decide to renew the policy.

While your insurer is unlikely to deny coverage, it will charge you a higher premium. However, they3 do reserve the right to reject you for coverage because of dramatic changes in your health. Your insurer will demand a higher premium to compensate it for the higher probability of your death in the renewal period.

Term life insurance provides insurance coverage in exchange for a premium that is generally cheaper than a premium for permanent life insurance. Also, term life insurance is often paid with level premiums, at least until it's time to renew the policy.

The following table shows how premiums generally are quoted according to your health, age, and gender, but keep in mind the rates you see do not include any underwriting concerns, such as health or occupational issues. The table simply shows a range of level premiums.

The candidate is a healthy, non-smoking 45-year-old seeking a $100,000 term life policy in Pennsylvania. For example, this person would pay somewhere between $123 and $189 in annual premiums for a 10-year term life policy.

Range of (level) term life premiums, 10 and 20 years:

Source: Ipipline

These quotes are intended to serve only as a sample, showing the relative ranges of possible premiums. You will notice that the quotes for women are cheaper, as women have a longer average life span and lower fatality rate from accidents, than do men.

In addition, you see how the premiums increase for the 20-year term. The higher premiums incorporate the higher mortality risk associated with the longer period. A 45-year-old has a greater probability of dying within 20 years than within 10 years.

To determine whether term or permanent insurance is best for you, you should evaluate the different types of permanent life insurance available. The major types are whole life, universal life, and variable life insurance.
The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.

Next, we'll take a look at universal life insurance.