How Term Life Works

Term life insurance policies are sold for a specific number of years. Ten- and 20-year terms are the most common. The "term" in term insurance means the following:

Number of years your policy coverage lasts. A term life insurance policy's death benefit is only paid if the policyholder dies during the coverage period. If the term ends or the policyholder stops paying premiums, the policy lapses. A lapsed policy is a worthless policy.

Number of years you are required to pay premiums. Term life insurance requires you to pay premiums regularly in order to maintain policy coverage. Term life insurance does not build up cash value the way premiums do for permanent life insurance.

Larger premiums when renewing the policy. When you first buy a term life policy, you may decide you only want coverage for 10 years. Ten years later, however, your circumstances may have changed. You may decide to renew the policy.

While your insurer is unlikely to deny coverage, it will charge you a higher premium. Let's face it: you're 10 years older and death is that much more certain. Your insurer will demand a higher premium to compensate it for the higher probability of your death in the renewal period.

Term life insurance provides insurance coverage in exchange for a premium that is generally cheaper than a premium for permanent life insurance. Also, term life insurance is often paid with level premiums, at least until it's time to renew the policy.

The following table shows how premiums generally are generally quoted according to your health, age, and gender. The table shows a range of level premiums from one of the many Web sites that provide free online quotes for term life insurance premiums. (You will still need to obtain a certificate of insurability from a physician to verify that your health condition is as good as you claim it to be.)

The candidate is a healthy, non-smoking 50-year-old seeking a $100,000 term life policy in California. For example, this person would pay somewhere between $151 and $325 in annual premiums for a 10-year term life policy.

Range of (level) term life premiums, 10 and 20 years:

Gender	Term	Range of annual premiums
Male	10 years	$186 - $325
Female	10 years	$151 - $240
Male	20 years	$312 - $501
Female	20 years	$225 - $378

Source: Lifeinsurance.net.

These quotes are intended only as a sample to show the relative ranges of premiums. These are not intended as marketable quotes. You see that the quotes for women are cheaper, reflecting a longer average life span and lower fatality rate from accidents.

In addition, you see how the premiums increase for the 20-year term. The higher premiums incorporate the higher mortality risk associated with the longer period. A 50-year-old has a greater probability of dying within 20 years than within 10 years.

To help you decide whether term or permanent insurance is best for you, you should evaluate the various types of permanent life insurance. The major types are whole life, universal life, and variable life insurance.

The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.