How Term Life Insurance Works

Term Life Insurance

What is life insurance? It's a contract between a life insurance company and an individual.

The life insurance company agrees to provide a death benefit to the beneficiary of your choice upon your death, and in return, you agree to pay premiums to the life insurance company to provide you with the coverage.

There are two basic types of life insurance: Term and Permanent.

Term life insurance is life insurance for a specific period of time, usually up to 30 years. The "term" of a term life policy is the period for which your coverage lasts at a guaranteed rate. Terms may last 5, 10, 15, 20 or 30 years.

If you pass away during the term of your policy, your beneficiary receives the death benefit, subject to any exclusions. If you outlive the term, your coverage expires.

Permanent life insurance provides lifetime coverage with guaranteed level rates, and may build up cash value inside your life insurance policy over time. You may be able to take a loan out from the cash value. Some insurers allow loans of up to 80% of the cash value in your policy.

Term life insurance costs a lot less than permanent life insurance plans because it is temporary and does not build cash value.