How Does Term Life Insurance Work?


Quick Answer

Term life insurance pays a death benefit to an insured’s beneficiaries if the insured dies while the policy is in force. The term and dollar amount of coverage are determined at the inception of the policy, and premiums are normally paid monthly, quarterly or annually.

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Full Answer

Large term insurance coverage amounts typically require a rigorous underwriting process. While some term insurance can be renewed automatically at the end of the initial term regardless of the health of the insured, other policies require new underwriting. Premiums for term insurance are usually fixed for the life of the initial term. When the initial term expires, even on renewable policies, the premium is almost certain to increase. Term life policies at times pay a differing death benefit amount depending on the cause of death, and this can increase the cost of the insurance. In addition to the cost of a policy, the buyer of a term life policy should be concerned with the financial strength of the issuing company. If an insurer becomes insolvent, their ability to meet the claim paying needs of their clients can be affected. Term insurance is considered one of the most affordable means to protect survivors against the financial loss caused by a person’s death.

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