Term life pays a predetermined death benefit if the insured dies during the period of time the policy is in effect. The term can range from a single year to a period ending at a specific age, such as 65 or 70. If the insured does not die during the term of the policy, the policy expires with no death benefit.
Term life is generally less expensive than other forms of life insurance since a benefit is provided only upon death and only for a limited period of time. Unlike many other life insurance policies, there is no penalty to terminate the policy before the end of the term. Since term life policies provide no accumulation of cash values or dividends, they can generally be compared to one another on the basis of their premium.
The amount of death benefit can be a level, decreasing, or increasing amount to match your insurance needs. For example, a decreasing term policy may provide a death benefit that matches the decrease in your mortgage loan balance.
Term insurance allows a higher death benefit to be purchased for less money than other types of life insurance policies. This may be particularly important for young families with limited income and a higher need for insurance. Term insurance is also useful for protecting the family members in the event of the death of a wage earner during periods of high debt, such as during the terms of a mortgage or car loan.
Most shorter term policies offer an option to continue or renew for an additional period of time. This option gives the advantage that the insured does not have to show evidence of insurability in order to maintain the policy for additional periods of time.
The premium charged each renewal will be based on the insured's age at the time of the renewal.
Most term policies offer an option to exchange or convert the term policy for a cash value or whole life insurance policy without providing evidence of insurability. This option provides flexibility to those who may have preferred a policy with cash value accumulation, but could not afford it at the time of purchase.
This option becomes valuable if an insured develops a medical condition during the policy term which renders them uninsurable or insurable but only at a higher premium rate.
Credit life insurance is a type of term insurance that pays the balance due on a loan or debt if you die. In Alaska, the death benefit on a credit life insurance policy is required to match the remaining balance of the loan.
Credit insurance is usually sold through a bank, store, or auto dealer at the time of a loan transaction. If you purchase credit life insurance and decide to pay off your debt early, your insurer is required to refund your unearned premium. Note that a standard term life policy can be used for the same purpose as a credit life policy, but often at a much lower cost.