Glossary
Term life insurance, defined
Coverage that pays a fixed death benefit if the insured dies within a set number of years and pays nothing if they outlive it. The premium is usually level for the whole period, and there is no savings component.
In practice
It is the right product for a need that ends: a mortgage, children's dependency, a business loan, a partner's income until retirement. Because the carrier is pricing only the chance of death during the period, the premium for a healthy applicant is a small fraction of a permanent policy's, and the benefit can be sized to the actual need rather than to what is affordable. Most policies are convertible to a permanent policy without new medical underwriting until a set age, which preserves the option if health changes. Premiums jump sharply at the end of the level period if the policy is continued, so the length should be chosen to match the need, not the smallest premium. Underwriting class decides the price: the same benefit at the same age can cost twice as much one class down, so answering the application accurately and scheduling the exam well matters. The analysis sizes the benefit to the obligations and recommends a period, and says plainly when a smaller or shorter policy is enough.
A worked example
Suppose a thirty-five-year-old parent with a $350,000 mortgage and two young children buys a twenty-year policy with a $750,000 benefit for about $45 a month in a preferred class. Suppose she dies in year eight; the carrier pays $750,000 to her named beneficiary, income-tax free. Suppose instead she is alive at year twenty; the policy ends, having cost about $10,800 in total, and the mortgage is nearly paid and the children grown. Hypothetical figures.
Applies to: Term Life InsuranceLife Insurance