How Does Term Life Insurance Work

A term life insurance is also known as a term assurance policy. It is a type of policy that provides insurance coverage just for a limited period of time, i.e., the predetermined term or period. The policy also entails fixed rate payments, just like normal policies, and it is only the term period that is the major differentiating factor between the two. In a contract of this type of policy, when the coverage period expires, the insured individual must choose one of two options – he must either forgo coverage, or obtain another coverage with different payment terms and conditions.

Points to Ponder

The major positive that this policy provides is that it is usually the less expensive way of getting good benefits out of the policy per dollar of premium paid. On the other hand, if the insured individual does not outlive the policy period and passes away, the beneficiaries are entitled to a payout as per the policy. Another thing to consider is that if the insured acquired a terminal illness during the term of the policy, but does not actually die of it, he may not get another insurance later, as he may then be deemed as ‘uninsurable’. Though some policies come with ‘guaranteed re-insurability’ clauses, one can only imagine the premiums when such a condition arises.

How Does it Work?

This process can be understood better when divided in two segmented parts. The first part will give better understanding of the policy, and the second part will give the process.

What to Expect?

Unlike normal circumstances, where a guaranteed lump sum of capital is built up to provide the beneficiaries with an income after you are gone, in term life insurance, there is no such cash build up. It is an instrument designed just create a required amount of ‘survivor’ capital at a low outlay for a fixed term duration. For people who go for this policy, the objective is only to get the full amount of coverage needed for realistic family security goals and decently-low, out-of-pocket costs, especially, when the insured individual is young.

To make full use of the policies, one must know that exact term duration that suits his needs. This requires a long-term analysis of debts and financial needs in the future. One also needs to analyze the various options, and choose the one that gives the best fit with his future plans. The three main types of this policy are as listed below.

  • Level Term Life Insurance: The rates and coverage amounts remain the same throughout the term duration of the policy.
  • Decreasing Term Life Insurance: Though the rates remain the same throughout the term duration, the coverage amount decreases each year.
  • Annual Renewable Term Life Insurance: It offers guaranteed renewals after each year, but with a rate increase at each renewal.

Getting the Policy

As affordable policies, its contracts serve as the best coverage options. The first step though, is to get the quotes from the agents or online portals on insurance companies. The full physical examination that is required by most companies may not be required here, but you may still have to deal with some pretty prying questions.

With this policy, you get full cover, and thus, full payment of the amount, no matter when the insured person passes away during the term period. As the company is betting on the likelihood of you not dying within the insured term, the risks borne by them are lower, and hence, the low premiums. On the other hand, just like normal cases, the company aims at earning enough premiums in total, to enable it to make a small percentage of payments within each term. This is the logic behind how term life insurances work.