Term life insurance is a type of life insurance policy that provides financial protection for a set period of time. If the policyholder dies during this period, the insurance company pays a death benefit to the beneficiary.
Benefits
- Financial security: Provides a financial safety net for your family in case you die
- High life cover: Provides a large sum assured at a relatively low premium
- Fixed premiums: The premium paid each year remains the same for the duration of the contract
How it works
- The policyholder pays a fixed premium in exchange for coverage for a specific period of time
- If the policyholder dies during the policy term, the insurance company pays the death benefit to the beneficiary
- The death benefit can help cover living expenses such as food, clothes, healthcare, and education
Other considerations
- Term insurance policies have a free look period and a grace period
- Policyholders can opt for riders that provide additional coverage
- The cash benefit is not typically taxable
How Term Life Insurance Works
When you buy a term life insurance policy, the insurance company determines the premium based on the policy’s value (the payout amount) and factors such as age, gender, and health. Other considerations affecting rates include the company’s business expenses, how much it earns from its investments, and mortality rates for each age.
In some cases, a medical exam may be required. The insurance company may also inquire about your driving record, current medications, smoking status, occupation, hobbies, family history, and similar information.
If you die during the policy term, the insurer will pay the policy’s face value to your beneficiaries. This cash benefit—which is not typically taxable—may be used by beneficiaries to settle your healthcare and funeral costs, consumer debt, mortgage debt, and other expenses.
However, beneficiaries are not required to use the insurance proceeds to settle the deceased’s debts.