Term insurance is life insurance provided over a specified time period, and does not build a cash value as the assured sum is payable only to the beneficiary in the event of death. The premium that you pay for term insurance is dependent on the likelihood of your death during that period. This likelihood is affected by your health, age, gender and the length of the term in which insurance is desired. Term insurance does not serve as an investment, because it does not build up a cash value that would be paid on survival. It is intended strictly to provide insurance to a beneficiary in the event of death. If the insured person survives over the term of the policy, it expires at the end of the term and has no value.
Term insurance is cheaper for younger individuals, for women (as they tend to live longer than men), and for shorter time periods. Policies are usually renewable, although you will have to pay higher premiums to reflect your age at the time of renewal.
Term insurance policies can be written on a single life, joint life (first or second death) or on a 'life of another' basis. If you are taking a term insurance on some other person's life, then you will have to prove that you have a financial interest in that person (like a wife insuring her husband, for example).
Two terms are often used in the context of term insurance: level term insurance and decreasing term insurance. You will find several variations of these types of term insurance, according to your needs and suitability.
Level Term Insurance
In level term assurance, the premiums are fixed for the duration of the insurance term, and a payment will only be made if the policyholder dies during the insured period. A level term insurance policy is taken out for a fixed term and is designed for providing security for dependents up to a certain age.
Decreasing Term Insurance
This is a common type of term insurance, in which the insurance benefits to the beneficiary are reduced over time. The premium paid for the insurance remains constant over the term. This type of insurance is popular for families because it provides a relatively high level of insurance in the earlier years when it is most needed. As time passes, the family can accumulate savings, pay off mortgages and increase their investments. In all, the family could survive with smaller insurance benefits. This type of term assurance is less expensive than level term assurance.
Author Steven Bartowdate added 2009-08-26 10:14:29