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How Does Term Insurance Work?


How Does Term Insurance Work?

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Most people know that the main difference between term and whole life insurance is that term is temporary, while whole life is permanent coverage that doesn't end unless you want it to. In fact, you can terminate either type of coverage by simply not paying the premiums or selling the policy to a company that specializes in buying them. In all the comparisons you can read, online and elsewhere, about the differences between these two kinds of insurance policies, term usually gets a bad rap. So, what exactly is it and how does it work? Do people sell term policies, cancel them, renew them, or simply let them lapse? Here's a quick rundown on how temporary coverage works for individuals who are policyholders.

The Terms are Fixed

The name of this kind of financial protection is apt because it usually endures for specific terms of years, commonly 5, 10, 20, and 30 years, during which the premiums do not rise. If the time lapses and you decide to buy another contract, then you will not have the advantage of keeping the same premium.

You Can Sell When You Need To

Most people know that you can sell whole life policies, but not as many are aware that it's also possible to sell a term policy too. If the concept is new to you, review a guide on the process for selling your life insurance policy. After you go online, it only takes a few minutes to find a company to buy it and complete the transaction. Usually, you have access to the cash within a matter of a day or two and can spend or save it as you wish. In this respect, term and whole coverage are not different from one another, even though the two tend to be unalike in most other ways.

There's No Borrowing

Traditional term-coverage does not allow the policyholder to borrow. That's because there's no stated cash value to borrow against in the first place. The main feature of short-term, or temporary insurance is to provide a death benefit to the named beneficiary, not to build cash value against which the policyholder can borrow.

Prices Are Relatively Low

Compared to the other main type of insurance, these temporary policies sell for low prices. One reason is that they don't come with a lot of bells and whistles. In the majority of situations, such coverage simply provided a death benefit and nothing else. Note that there are variations which allow the holder to get some money back, or renew at certain intervals. However, for people over the age of 50, temporary insurance policies are not always cost effective or affordable.

Some Coverage Types Offer Return of Premium

Return of premium term coverage costs more than standard versions but comes with a unique, and for some people a very attractive, feature. When the term runs out while you are still alive, the carrier will return a portion of your premiums to you. People who want the peace of mind of having a basic death benefit but are willing to pay higher premiums often choose the return of premium variation.

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