How Term Life Insurance Work?
Term life insurance works by providing coverage for a specified period, known as the “term,” in exchange for regular premium payments.
1. Selecting Coverage Amount and Term: When purchasing a term life insurance policy, you first determine the amount of coverage you need (the death benefit) and the length of time you want the coverage to last (the term). Common term lengths include 10, 20, or 30 years, but other options may be available depending on the insurer.
2. Premium Payments: You pay regular premiums to the insurance company to keep the policy active. Premiums can usually be paid monthly, quarterly, semi-annually, or annually, depending on your preference and the policy terms.
3. Coverage Period: During the term of the policy, if the insured person (the policyholder) passes away, the insurance company pays out a death benefit to the beneficiaries named in the policy. This death benefit is typically a tax-free lump sum payment and can be used by the beneficiaries to cover various expenses, such as funeral costs, outstanding debts, ongoing living expenses, or future financial needs.
4. Renewal and Convertibility Options: Some term life insurance policies offer the option to renew the policy at the end of the term, usually at higher premiums since the insured is older. Additionally, many policies include a convertibility feature, allowing the policyholder to convert the term policy into a permanent life insurance policy without the need for a medical exam.
5. No Cash Value: Unlike permanent life insurance policies (such as whole life or universal life), term life insurance does not build cash value over time. This means that if you outlive the term of the policy, no benefits are paid out, and you do not receive any return on the premiums you’ve paid.
6. Purpose of Coverage: Term life insurance is often used to provide financial protection for specific needs that may expire over time, such as paying off a mortgage, funding a child’s education, or replacing lost income for dependents.