What is Term Life Insurance & How Does it Work?

An Introduction to Term Insurance and the Life Protection it Gives

Nov 3, 2009 Carol Finch

Consumers have different types of policies to choose from when looking at their life coverage. One of the most popular is term life insurance. How does this work?

Many consumers will opt to take out a term life insurance policy rather than a whole life option. How does a term product work compared to other policies, what are the options on offer and why is this such a popular choice?

What is Term Life Insurance?

This kind of life policy gets it name from the fact that it will not last forever. Each product here will be given a specific finish date from the start. This could, for example, put the policy in place for 10 or 25 years. Once the policy reaches the end of its term, it will be closed down.

What Does Term Insurance Give Cover for?

During the term of the policy its holder will be given insurance coverage. So, if they die while the policy is still in force then its benefits will be paid. Once the policy is finished, however, the holder will have no insurance coverage and no claim can be made if they die after that date unless they extend coverage or take out a new policy.

Why are Term Products so Popular?

People often prefer this kind of policy to whole of life options as it will generally work out cheaper. There is no guarantee with a term policy that the insurance company will ever have to pay out. So, this enables insurers to charge less for this product type.

Insurers know that there is a good chance that a policy holder will live longer than their insurance term. This means that they will never have to make a claim and their premium payments will be profit.

Are all Term Life Insurance Products the Same?

These products all share this term element but there are a variety of options in this sector. These include policies that offer:

  • Level term benefits (i.e. the insured sum stays the same for the term of the policy).
  • Decreasing term benefits (i.e. the insured sum will decrease over time).
  • Increasing term benefits (i.e. the insured sum will increase over time).

Consumers can also choose from different payment types. Some, for example, will opt for a lump sum payment. Others prefer to take out a Family Income Benefit policy that pays an income rather than a fixed one-off sum.

Things to Consider Before Taking out Term Insurance Coverage

It is important to weigh up the pros and cons of this kind of policy and to compare it with other options such as whole life. This enables the individual to make an informed decision on the type of policy that will suit them best.

Getting the right cost here may also be important. There are a variety of ways of saving on life insurance costs which may be worth using.

Source: The Financial Services Authority

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