What are the characteristics of term life insurance? Term life insurance pays a specified amount of money to beneficiaries if the insured person dies within the term of the policy. That is the basic definition of a term life policy. The policyholder pays premiums throughout the term to maintain insurance coverage. Some of the main features of these policies are low premiums, no cash value, and is for a fixed period of time, unlike whole life policies. Let’s look at these features in depth.
When compared to whole life policies, one of the most significant features is the low premiums associated with it. Whole life policies often have higher premiums compared to similar coverage in a term policy. Because there is a fixed period that the insurance covers, the risk to the insurance company is less than with a whole life policy. They pass that reduced risk on to the consumer in the form of lower premiums. Another reason for the lower premiums is the fact that there is no accumulated cash value in the policy. The insurance company uses the premiums to cover the face value of the policy. There is no need to manage investments in the money for the benefit of the consumer.
No cash value means that if the named insured is still alive when the policy ends, nothing is recovered for the premiums assigned to the policy. There is also no possibility of borrowing against the value of the policy, since it has no real value until the named insured dies. Another important feature is the fact that the policy has an end date. Most policies have various 5-year increments, such as 10, 15, 20, or 30 years. But, many companies can also write policies for other terms.
There are other features of this type of life insurance. One is the fact that although the policy is for a fixed term, most allow for renewal at the end of coverage. This means you can extend coverage for another policy term. The biggest problem with this is that premiums often increase due to renewal. Another feature is that some policies allow conversion to a permanent life policy if desired. A portion of the premiums paid before conversion helps increase the value of the permanent policy. This is one of the reasons why this investment is popular.
