As its name implies, term life insurance provides protection for a specified amount of time. Should the insured (the person whose life it covers) die while the policy is in force, the insurance company will pay out the face amount of the policy. The general standard for a term policy is 10 years. However, you can purchase 1-year term, or in some cases, 5 or more years. Term policies are also available in whatever face value amounts you deem necessary to cover your needs.

Term is the purest form of insurance in that it provides that the insured’s beneficiary will receive the face value of the policy should the insured die within the specified time frame. There are no extra benefits or investment choices with term, as there are with other types of insurance. What you see is what you get.

Because term is a no-frills insurance policy, it is also the most inexpensive way to insure your life. You know those commercials on television that tout insurance protection for just dollars a month? They usually say, “Tom, a 40-year-old, nonsmoking male can get a policy for just $18 a month.” Those types of policies are term insurance. The reason they are so inexpensive is because there is limited risk to the insurance company to actually have to pay out the face value, or death benefit, since the insurance company is only assuming the risk for a specified amount of time. In fact, the younger the person, the less expensive protection becomes. However, as a person ages, the cost to insure that person becomes increasingly more expensive. When I refer to term insurance, I am always careful to say that it is “inexpensive” instead of “cheap.” Human life is not cheap, and since these policies are designed to provide some financial relief for the insured’s beneficiaries, they aren’t cheap either, no matter what the premium is.

There are a few types of term policies, but the most common types are level and decreasing term. Term policies are also convertible and renewable, which we will cover, too.

Annually Renewable Term

This type of policy, also called yearly renewable term, acts just as the name implies. As the insured gets older, the amount of the premiumincreases. Therefore, the policy may be relatively inexpensive when the insured is younger, but as the person ages, the cost of the premium will increase dramatically.

Level Term

Level term policies are also commonly referred to as “straight term” policies because the amount of coverage doesn’t change as long as the policy is in force. That is, if you purchase a 10-year level term policy with a $100,000 death benefit, it will remain a $100,000 death benefit from day one to the very last day of the policy. These policies are written for a given number of years, such as 1, 5, 10, or more.

The premium amount for a level term policy remains the same for the life of the initial term. So, by purchasing a 15-year term policy, you will pay the same premium for those 15 years. However, should you decide to renew the policy, you will see an increase in your premium because you are now 15 years older. Thus, as you renew your term policy, the premiums will continue to increase. Some term policies will allow you to renew for the exact same time period as the initial period, while others will allow you to renew on an annual basis once the original time frame has expired. The premium price for level term is more stable than for annually renewable term, but it will also be more expensive.

Decreasing Term

Sometimes a term policy will keep a level premium throughout all periods of coverage, but the death benefit will decrease. These are decreasing term policies. These are used when the amount of coverage needed diminishes over time. For instance, you and your spouse purchase a home with a 30-year mortgage. While you both work, your spouse doesn’t earn as much money as you and is concerned that if something were to happen to you, he or she would be unable to continue with the mortgage payments. In this case, you could purchase a decreasing term policy for 30 years. Because the amount owed on the house decreases every year, you wouldn’t need a level term policy that would carry the same death benefit throughout the whole 30 years. Rather, your decreasing term policy could coincide with how your mortgage decreases.

Another popular use for decreasing term is with families with young children. The policy would ensure a sufficient level of income while the children are growing up. As the children grow older, the need for as much coverage decreases until the youngest child has moved out and is on his or her own.

Renewability and Convertibility Provisions

When a someone takes out an insurance policy, that person generally has to answer questions about his or her health and hobbies to make sure that the insurance companies see them as a suitable risk. Many times, the prospective insured must even have a physical, but this usually depends on how much coverage that person is requesting. Most term policies are renewable for successive terms without the insured having to show proof of insurability again, although the amount of successive renewable terms may be limited. If you decide to purchase term insurance, be sure your policy has a guaranteed renewable provision, which is usually provided at no cost by the insurer. This will protect your ability to renew your policy should you become uninsurable due to an illness or accident. Never buy a policy that doesn’t have a renewability option.

Term policies may also have the ability to be converted into whole life or other types of permanent policies for the same, or lesser, amount of coverage. Again, the insured wouldn’t have to prove that he or she is insurable since that person already had a term policy. Insurance companies usually protect themselves by establishing a maximum age, at which time the insured would no longer be able to convert. The biggest advantage to converting your policy is that you would then have protection for the rest of your life as long as you continue to pay your premiums. This option is standard in most term policies.