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Term life insurance

Term life insurance is a type of insurance that provides the policy owner with a life insurance for a fixed period of time that is stipulated in the contract. The premiums for this kind of insurance contract has to be paid only till the end of the policy but, as a result, if the individual dies after the contract had expired than his dependents will not get a compensation from life insurance company.

Premiums for this type of contract are lower than for permanent life insurance contracts that do not have expiration dates. However, if after the fixed period stated in the contract an individual wants to renew his life insurance the premiums and other conditions of the policy are also going to be changed. Since the person will then be older and may even have some health problems it is almost inevitable that the premiums will be fixed at a higher level.

Disadvantages of term life insurance

The main drawback of term life insurance is that after the expiration of the contract the insurance companies usually require proof of insurability. If a person has very serious health problems, he may be regarded as not insurable because of very high risk that would be faced by the insurance company. Nevertheless, a risk averse person can buy a guaranteed reinsurability option and a result know that even if his medical check up showed serious health problems he will still be insured.

Usage of term life insurance

Term life insurance is advised to be used for income protection and coverage of financial responsibilities. Income protection purpose means that the lump sum paid by the life insurance company will replace the salary or other income that was previously earned by the insurance company. Financial responsibilities include things like consumer debt, dependent care, funeral expenses, mortgage and other loans and college education for children.

Most people choose the expiration of life insurance cover to coincide with the end of an important financial responsibility like the termination of the loan or the graduation of children from the university. A good example of this is a term life insurance contract called annual renewable term insurance. A guarantee of insurability if offered and in return the contract is renewed every year with constantly growing premiums. This type of insurance can be used for short-term purposes because the longer the person uses annual renewable term insurance the more it costs for him.

Alternatives to term life insurance

An alternative to annual renewable term insurance is level term insurance. For this type of insurance the premiums remain the same thorough the insurance contract. However, it is important to remember that the longer is the duration of the insurance policy the higher will be the leveraged premiums. The guaranteed insurability option may or may not be included in this kind of contract so it is important to discuss this benefit with life insurance carrier.

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