Term life insurance or term assurance is life insurance which provides coverage at a fixed rate of payments for limited period of time, the relevant term.
After that period expires coverage at the previous rate of premiums is no longer guaranteed and the clients must either forgo coverage or potentially obtain further coverage with different payments and/or conditions. If the insured dies during the term, the death benefit will be paid to the beneficiary. Term insurance is the least expensive way to purchase a substantial death benefit on a coverage amount per premium dollar basis over a specific period of time.
Term life insurance is the original form of life insurance and can be contrasted to permanent life insurance such as whole life, universal life, and indexed universal life, which guarantees coverage at fixed premiums for the lifetime of the covered individual. Term insurance is not generally used for estate planning needs or charitable giving strategies but for pure income replacement needs for individuals.
Term insurance functions in a manner similar to most other types of insurance in that it satisfies claims against what is insured if the premiums are up to date and the contract has not expired, and does not expect a return of Premium dollars if no claims are filed. As an example, auto insurance will satisfy claims against the insured on the event of an accident and a home owner policy will satisfy claims against the home if it is damaged or destroyed by, for example, a fire. Whether or not these events will occur is uncertain, and if the policy holder discontinues coverage because he has sold the insured car or home the insurance company will not refund the premium. This is purely risk protection.
Because term life insurance is a pure death benefit, its primary use is to provide coverage of financial responsibilities, for the insured. Such responsibilities may include, but are not limited to, consumer debt, dependent care, and college education for dependents, funeral costs, and mortgages. Term life insurance is generally chosen in favor of permanent life insurance because it is usually much less expensive (depending on the length of the term). Many financial advisors or other experts commonly recommend term life insurance as a means to cover potential expenses until such time that there are sufficient funds available from savings to protect those whom the insurance coverage was intended to protect. For example, an individual might choose to obtain a policy whose term expires near his or her retirement age based on the premise that, by the time the individual retires, he or she would have amassed sufficient funds in retirement savings to provide financial security for their dependents.