Term insurance is a type of life insurance policy that provides coverage for a certain period of time, or a specified “term” of years. Term insurance is initially much less expensive when compared to permanent life insurance. If the insured dies during the time period specified in the policy and the policy is active – or in force – then a death benefit will be paid. A good way to understand a product is by its origins. Term insurance was created as loan protection for lenders. Lenders wanted insurance on a borrower in case of death. The borrowers did not want to take out expensive permanent protection for a loan they planned to pay back within a certain time period. So term insurance was created. To this day many banks require a borrower of a mortgage or other loan to take out a life insurance policy which is usually term.
These origins illustrate that term isn’t always best. Life insurance is always individual and case specific.
Term policies offer level premiums for the duration of the policy, such as 10, 20, or 30 years. Premiums are level for a set number of years, after this time period the premium increases significantly. Most term policies have an option to convert to a permanent policy regardless of any changes in the insured’s health.