What is Term Life Insurance?

The function of life insurance is to replace your income for your dependent family members in the event of your death. There are two common types of life insurance: Term life insurance and whole life insurance.

Term life is sold for a defined period—5, 10, 15, 20 or 30 years—and is chosen to coincide with how long you need to safeguard your income. Most people choose 20 years because it covers the time until their children become adults and are no longer dependents.

Term life costs less than whole life because it has no cash value, i.e., it doesn’t pay out unless you die. It’s estimated that only about 2% of term life policies pay out a death benefit. The deviation in cost between term life and whole life is significant. Yearly premiums for whole life may be 15 to 20 times the premiums for term life, depending on your gender, age, health and the amount of insurance you are buying.

Premiums remain the same for the period of the policy. Some term life policies convert to whole life. Most can be extended past the initial term, but the premium will likely rise substantially.

Jemma Everyday Wisdom: There is a common saying in the industry, “Buy term and invest the difference,” which speaks to the difference in premium between term and whole life. For some disciplined savers, it may be a worthy consideration, as money invested in a 401(k), IRA or Roth IRA may return more than what you would earn from a whole life policy.