Term Life Insurance
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. In some cases, a medical exam may be needed. The insurance company may also inquire about your driving record, current medications, smoking status, occupation, hobbies, family history, and similar information.
Example of Term Life Insurance
Thirty-year-old John Doe wants to protect his family in the unlikely event of his early death. He buys a 10-year, $500,000 term life insurance policy with a premium of $100 per month.
If John dies within the 10-year term, the policy will pay his beneficiary $500,000. If he dies after the policy expires, his beneficiary will receive no benefit. If he renews the policy after 10 years, the premiums will be higher than his first policy because they will be based on his current age of 40 rather than 30.
If John is diagnosed with a terminal illness during the first policy term, he probably will not be eligible to renew the policy when it expires. Some policies do offer guaranteed re-insurability (without proof of insurability), but such features come with a higher cost.
