Term insurance is the most basic type of life insurance. It is a ‘pure protection’ policy because it only provides a death benefit and accumulates no cash value. Term insurance is similar to property insurance (i.e. home, auto) because coverage is rented and when the insured dies, the insurance company will pay the death benefit. If death does not occur before the term expires, no death benefit is paid and the policy must be renewed to maintain coverage. Most term policies are “guaranteed renewable” which means that they can be renewed without having to prove insurability.
Because term insurance only provides death protection, it offers the least expensive form of coverage. This low-cost for larger amounts of coverage makes term insurance an attractive option for families who require large amounts of death protection at low-cost (lower-income families, young families, etc.). While term insurance is inexpensive in the early years, the cost increases significantly as the insured ages, especially beyond age 65 as the probability of death increases. Though at a certain point it becomes impractical to maintain a term insurance policy, the lower cost in the earlier years allows individuals to save, invest and otherwise efficiently manage their debt in such a way that they are able to self insure in those later years. If a family fails to save during the early years, they may be worse off with term insurance.
To better understand the cost/benefit of term policies, consider this: While only 1/5 of life insurance policies issued are term policies, term policies account for almost 50% of the total death protection purchased.
The ideal use of term insurance would be to utilize the inexpensive death protection coverage until an advanced age or until coverage is no longer needed. The appropriate type of policy is highly dependent upon the individual or family in question because many factors must be considered.