How Term Life Insurance Works
Term life policies have no value other than the guaranteed death benefit. There is no savings component as found in a whole life insurance product. The policy’s purpose is to give insurance to individuals against the loss of life. This cash benefit may be used by beneficiaries to settle the policyholder’s healthcare and funeral costs, consumer debt, or mortgage debt among others. Term life insurance is not used for estate planning or charitable-giving purposes. All premiums cover the cost of underwriting insurance. As a result, term life premiums are typically lower than permanent life insurance premiums.

Characteristics of Term Life
The basis for term life premiums is on a person’s age, health, and life expectancy, which is set by the insurer. If the person should die within the specified policy term, the insurer will pay the face value of the policy. Should the policy expire before the policyholder’s death, there is no payout. Policyholders may be able to renew a term policy at its expiration, but their premiums will be recalculated for their age at the time of renewal.

Because it offers a benefit for a restricted time and provides only a death benefit, term life is usually the least costly life insurance available. A healthy 35-year-old non-smoker can typically obtain a 20-year level-premium policy with a $250,000 face value for $20 to $30 per month. Purchasing a whole life equivalent will have significantly higher premiums, possibly $200 to $300 per month. Because most term life insurance policies expire before paying a death benefit, the overall risk to the insurer is lower than that of a permanent life policy. The reduced risk allows insurers to pass cost savings to the customers in the form of lowering premiums.