What is Term Insurance?

Term insurance is a type of life insurance that has no cash value. The policy only provides coverage for a specific period of time, after which an additional payment must be made in order to obtain coverage for an additional period of time. The cost of term insurance increases over time, as a person becomes older and is therefore at greater risk of death. If a person dies during a covered period, the beneficiary is paid the amount specified in the insurance contract. If the person does not die during a covered period, the beneficiary receives nothing.

Example of Term Life Insurance

Henry wants to protect his spouse and children in the event of his untimely demise. To do so, Henry purchases a $1 million term life insurance policy. This policy is a contract that obligates the insurer to pay his family $1 million if he were to die at any point during the next 10 years. In exchange for the possibility of this payout, Henry agrees to pay the insurer $125 per month for the next 10 years. If he is still alive in 10 years, his family will receive nothing and the insurer will have no obligation to make any future payments to Henry’s family. If Henry elects to renew the policy after its expiration, the monthly premium will increase, since he will then be older and so will be at greater risk of death.