What Is Term Life Insurance?

Life insurance does not protect individuals from the inevitable. Instead it offers a way for survivors of the deceased to pay off debts or to continue receiving monetary support. Term life insurance is one type of this protection. Unlike whole life insurance, term life policies are written for a specific period of time with no increase in premiums while the policy is in effect. There are several advantages of taking out a term life insurance policy, but those considering this type of insurance should understand the overall costs involved.

How Term Life Insurance Works
The younger people are the less likely they will die in the near future. This is certainly the case with preteens. Once a child is about five or six years of age it is far less likely he or she will die for any reason in the next twenty years when compared to any other age group. This includes infants and toddlers. Even a teenager or young adult has a very long life expectancy. Why would term life insurance be a good idea for a child or young adult?

The cost of such a policy is determined by the likelihood the policy will remain in force throughout the period for which it is written. Insurance companies charge very low premiums for younger people because this entices them – or their parents – to purchase. It is assumed that a 20-year policy will be paid for each and every month for the full 240 months, making a lot of money for the insurance provider. It is not likely any of the money will ever be paid to a beneficiary.

Because term life insurance is inexpensive for this age group, insurance providers advertise the idea that the protection amounts are worth looking into. A $100,000 term life policy for a teenager or young adult may be only about one-seventh the cost of a whole life policy written for the same amount.

Better Investment Opportunities

A whole life policy costs much more than term life insurance. This is because the monthly premium amount is split. Part is for the insurance itself and part is for the insurance company to invest. The idea is that the insured will profit mightily from this type of insurance many years down the road. Many people take out a whole life policy and cash it in decades later. The invested portion may have resulted in excellent returns and therefore works much like owning stocks.

Some financial advisers recommend that young adults should take out a much less costly term life policy instead and use the savings to invest on their own. Many argue that there is a better chance of turning a profit from the stock market or other trading venture than from a whole life insurance policy.

Age Determines Insurance Rates
If a 25 year old adult takes out a 20-year term life policy, he or she will find the rates much higher when the policy expires. A 45 year old will find it difficult to purchase the same policy again for less than twice the price of the original insurance. The rise in premiums is even sharper at age 55. Many people are satisfied with taking out a term life insurance policy that expires before they reach this age because they are confident their other investments, their life savings and the equity in their real estate will be sufficient to provide for their survivors. This is one reason very few individuals purchase life insurance after retirement.